3 Advisory Board Styles to Fit Every Business

Advisory Boards: Roles and Responsibilities

The boards of directors of for-profit and non-profit organizations have the same responsibilities: duty of care, loyalty, and good faith. While similar to fiduciary boards or governing boards, advisory boards are not the same. The function of an advisory board is usually not as broad as a fiduciary or governing board but advisory board members should conduct themselves with the same duties in mind.

What Does an Advisory Board Do?

Advisory boards contribute advice and opinions to meet a company’s needs. The amount of subjects and depth of discussion varies based on those needs. Advisory boards are usually formed when critical matters are too difficult for ownership to handle on their own and must solicit outside advice.

There is one key difference when establishing an advisory board versus a governing or fiduciary board of directors: there is no regulatory oversight required of advisory board members nor fiduciary duty to the company. This allows for some flexibility in selecting board members and deciding on committee structure and assignments.

Three Common Boards

Consulting Boards

Consulting boards meet one or two days per year when there is a pressing issue. The business owners buy a day of consulting time from outside advisors to focus on the issue of the day. Businesses in the $20-$50 million range may start with a consulting board before moving up to an advisory board. Businesses in the $10 million range typically do not have functioning consulting boards.

Junior Advisory Boards

As businesses grow, junior advisory boards may be established to pay more attention to the following issues:

• Management depth
• Capital structure
• Long-term planning
• Competition
• Organizational capabilities
• Market structure
• Crisis management

Members of junior advisory boards raise important questions and help to solve problems. Discussions often tiptoe around delicate issues like management performance, compensation, and succession planning.

Advisory Boards

This type of board is most comparable to a fiduciary board. Advisory board members actively engage in succession planning, management compensation, and management performance evaluation. This is more common with companies that bring in several hundred million dollars in revenue because the business complexity forces ownership to seek outside help.

At this size, ownership is keenly aware of succession issues. Succession planning, management training, and development are time-consuming subjects for the board since there is likely a mix of family and professional management or a transition towards professional managers.

Choosing the Right Board Style

How do you know which board style is most appropriate? The board becomes a reflection of the owners’ needs and personalities in addition to meeting the needs of the business. Advisory boards are usually formed when critical matters are too difficult for ownership to handle on its own, or new subject matter which is foreign to the decision-makers.

If potential advisors are diligent before accepting an invitation to join an advisory board, they will have understood these constraints and prepared for them before the first meeting. As the board’s charter expands, it’s important to define the roles, responsibilities, and authority of board members. As a business grows, you’ll want to seek more qualified professional advisors instead of golf buddies, lawyers, and bankers.

Business Growth Versus Advisory Boards

Most businesses strive to grow, and their growth rate is typically not so fast that the demands on a board quickly change. Venture-stage businesses are the obvious exception to this. Absent a major change, then the type of advisory board is unlikely to change. A capital event, a change in key executives, or an urgent exogenous industry event tend to be the catalysts necessitating board changes.

Newton’s first law of motion states that an object remains still unless acted upon by another force. In the same way, business owners tend to stay on the same path until the pain of conflict forces them to make a change. The greater the pain, the greater the need for outside advisors. Outside advisors should be selected who have the experience and the judgment proportionate to the business needs.

Businesses in transition need the guidance and insight that a high-functioning advisory board can provide. A business can be significantly better positioned to grow thanks to the knowledge that well-placed advisory board members contribute.

We think you’ll also like:

1. The Roles, Structures, and Duties of a Board of Directors
2. Developing Effective Board Charters
3. Tips for Creating an Effective Family Business Charter

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Understanding Risk Management Basics for Business Owners
2. Resolving Shareholder Disputes
3. How to Read a Balance Sheet – And Why You Care!

This is an updated version of an article originally published on March 26, 2019.]

©2024. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.