Forming an Effective Advisory Board

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Probably the first place to start is assessing your needs. A simple assessment of your strengths and deficiencies is a great place to start. Objectively ranking yourself and/or your management team on the following items may help.

Strategic Planning and Focus

Marketing

Sales

Finance and reporting systems

Human Resources

Continuous Improvement (manufacturing or non-manufacturing)

Risk Management

Now you have a place to start in terms of potential needs. Do you have specific needs over the short and long term and are you looking for experience in those facets of your business? Perhaps you see mergers and acquisitions as necessary in the future or you plan to grow organically. Again, these questions will help you determine what kind of guidance you may need from your board.

Determine what exactly you want from your board. Do you want someone to bounce ideas off of or do you want a board that picks you apart so you can grow? Or perhaps it is something in between. This will determine the type of people you want on your board which is just as important as the knowledge you need them to bring to the table. Setting these expectations will be critical in ensuring you attract the right people but is also sets the stage for how your board will function. More importantly, it will greatly impact how effective your board will be for you.

The size of your board is also impacted by your assessment of your needs. Most larger public boards have all the above disciplines covered. They may even have sub-committees that handle issues such as management compensation or corporate governance. Obviously, a new advisory board wouldn’t be that complex or large. Because of this, you may need to prioritize those areas that are most critical.

Give some thought to scope. You likely want your board advising you on the “big picture” stuff, not whether you should let go John in accounting. It doesn’t hurt to spell this out in your board expectations at the outset. You will also need to structure your meetings and ensure they operate at that level. This doesn’t have to be your job. You may look for someone on the board who has the ability to moderate these meetings in that fashion. In fact, a good number of boards have a board chair that works with the owners to plan meetings and the agenda. Again, this doesn’t have to be set in stone and can be rotated or assumed by you in the future.

Board compensation will also be a factor in board composition. The size of your company will likely dictate the size of board you can afford. Like anything, you get what you pay for. So you will need to balance size of board versus cost. There are no hard and fast rules for board compensation. But companies reaching a size of $60 to $100 million would likely have a board of 5-6 members. They would be paid between $20,000 to $30,000 annually plus $1,500 to $3,000 for quarterly meetings. Those are ball park figures as it all depends on the people you are trying to attract and their experience. Regardless, you will want to have a pretty firm idea of the compensation structure for your board. It may be helpful to view your board as you would any other investment. For example, if you were to budget $100,000 for a board of three in a company with a $3,000,000 EBITDA, You could then measure in your own head whether it is worth 3% of your EBITDA to have that resource both at the start and as you move forward. Looking at it another way, you likely spend that amount hiring other professionals such as your lawyer and accountant.  So would it make sense to spend an equal amount on three advisers with perhaps similar credentials?

You obviously want a board that is respectful and works together, but you also don’t want a board that agrees on everything. Ideally you want a balance of both. So spend time learning more about the working styles and accomplishments of potential members.  Also consider the “been there, done that” factor. You want a balance of people that have experience in your industry and/or in business itself. But you also want contrarians or people that don’t have all the answers from experience but can ask the right questions. It may be wise to limit the number of people that are intimate with your business and/or your industry as you want the board to be focused at the 30,000 foot level, not the ground floor.

At this point, you are likely thinking, man, this is far too complex for my initial board. Don’t worry, these are only factors to keep in mind. You may not get it right the first time and your needs will likely change over time.  Don’t be afraid to adjust as you go. You may be wise to limit your board spots to one year mutually renewable terms. That way, if you have to make some adjustments you will have that flexibility.

Most experienced board members will want to ensure potential liability is covered. Even if it is only an advisory board, there can be potential for liability. They will likely require you to have some form of director’s liability insurance. At a minimum, they will want an indemnification from the company in case things ever go awry. These are simple things to put in place and should not be an impediment to forming a board.

Where do you find board members? The answer is everywhere. You may belong to business groups or other groups that can be a source. It’s a little easier than interviewing a new hire in that a new hire knows there is a job. You can meet people and find out a lot about them before actually approaching them to be a board member. You may even have the opportunity to ask potential candidates for advice on a specific business issue and determining from that their ability to add value in a board role.

Unlike hiring for a position in your company, you are not in a rush as there is likely not an immediate need for a board. So you can take your time and build as you go. Take your time determining what you need and don’t try to get the perfect solution right off the bat. As we know in business, there is only progress, not perfection. Don’t be afraid to ask for help as there are numerous resources out there.

In summary, before you start be clear on what you want and then determine who you want. Decide on the level of investment and then move ahead. Like companies, effective boards are built over time, so get started and don’t be afraid to adjust as you go.

André Kriening is an Advisory Services professional with a background in accounting, finance, manufacturing and commercial lending.  After selling his business in 2013, André founded Strat+ Advisory Services, assisting other business owners and advisory boards with Strategic Focus, Leadership Development, and Operational Excellence. He can be contacted at: stratplus@shaw.ca or via cell: (204) 295-9013.