Creation of an Advisory Board made up of outsiders who are experienced business leaders is a way to “push the envelope” for a family business and cause business owners to examine directions and possibilities they might not otherwise consider. An Advisory Board can make the business stronger, increase shareholder value and better position the company to capture the opportunities that are available in the marketplace.
Scope of the Advisory Board
Advisory Boards have complete access to all information about the business. This includes financial statements, bank covenants, shareholder agreements, special arrangements or contracts within the owner group, existing strategic plans and other such information that will enable them to give sound advice on all matters. The Board makes non-binding recommendations on strategic issues, including but not limited to any financial transaction that represents more than 15%* of the company’s beginning of fiscal year equity. (*This percentage needs further discussion in each business. The intent is to include all matters that are strategic, regardless of the financial requirements, and to exclude those issues that are not strategic and below a certain financial level.) Once established, the Advisory Board can only be abolished by a unanimous decision of the active owners.
Composition and Terms of Service
An effective Advisory Board is comprised of four individuals, plus the active owners of the company. The length of the term of service for each of the four should be staggered such that there is a beginning and an end to the time of the appointment. Two, three and four-year terms are advised, with two of the four members taking three-year terms, and after the first cycle, all terms become 4-year terms. This allows for overlap of experience, re-configuring the board as owners gain experience with having such a group advise them. It is also a graceful way of changing the Board should any of the members be not quite the right advisor. Members may serve more than one term, should that be deemed appropriate.
Of the four outside advisors, one of them is to have clear financial expertise; one is to be known as a “visionary” in the industry and one is to be known as a person who “thinks outside of the box.” The fourth advisor should be about the age of the youngest generation in the family, and be known as a “go getter” in the industry, one who is viewed as a future business leader. This latter advisor can be identified by the younger generation working in the business.
Often when forming an Advisory Board, owners will think of appointing their accountant or lawyer. Experience suggests that the talents of these professionals are best utilized when they are engaged professionally to provide the services of their profession. After all, the business owner should be getting their best advice as a result of the fees that are paid. Further, including them on the Advisory Board violates the fundamental purpose of such boards. (See my previous post for more detail.)
In the first year of operation, the Advisory Board meets three times. The general model requires advisors to arrive at the meeting location in time for dinner the day prior to the meeting. Meetings will always include a “rolling 6 month” projection of business opportunities. Once the Board is in operation, members will receive an information packet five days in advance of the meeting that they will review before the meeting.
Compensation for the Advisory Board members varies by industry and from country to country. Compensation ought to be at a level that makes it attractive for the person to serve on the Board. In some cases, companies have offered alternative compensation, such as use of company perks or the company plane, up to a certain value. This is a negotiable matter.
It is important to set dates for meetings far enough in advance so they can easily fit into the advisors’ schedules. As the board becomes fully operational, it is often helpful to set the meetings a full year in advance.
Sample First Agenda
At dinner – Introductory Session – “What We do as a Company”
- “Show and Tell” – visit all plants and other facilities
- Discussion of company special processes, patents, and/or exclusive opportunities that influence the business
- Complete financial review
- Understanding existing owner agreements
- Current market position.
- Strategic plans for near-, mid- and long-term
- Operation of the Advisory Board – terms, information board prefers to receive in advance, formalizing the meetings schedule
If the concept of an Advisory Board appeals to you, I encourage you try it for a period of two years to see if you like the results.
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