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BUILDING AN ADVISORY BOARD

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In our last article related to the benefits of an advisory board, we discussed the importance of selecting board members with a diverse and relevant range of qualities and experiences. Click here to read the second article in this series.

One of the key attributes of an advisory board is that its members do not have fiduciary responsibilities and thus are not legally liable for decisions that result from their guidance. Instead, the advisory board is empowered to make recommendations, rather than binding decisions. This structure provides a great deal of latitude for the business owner to build an advisory board by leveraging the experience of individuals with specialized knowledge or technical expertise that align with the enterprise and its business objectives.

Recruiting Board Members

The informal nature of an advisory board also provides the owner/ CEO with the opportunity to treat board formation as a dynamic and organic process through which potential board members are carefully identified and cultivated. Therefore, board development will likely be an ongoing process driven by changing business and operational environments that pose new sets of management challenges.

Our last article mentioned several qualities to look for when selecting board members:

  • Committed with a Shared Vision
  • Comfortably Independent
  • Industry Expertise
  • Been in Your Shoes
  • Good Communicator
  • Well Connected

Of course, it is not enough to seek out people who tick these (and other) boxes. It is critically important to build a board with members who can actively engage with the management team and others. You want advisors who can add value to the enterprise.

Finding the right people – and bringing them on board – can take time. Since advisory board members are not going to be compensated at the level of a public company board, member recruitment should be a highly personal experience, akin to a courtship.

If done well, the process itself of identifying recruiting board members should yield intrinsic value to the owner and the management team.

Look for qualified individuals with varying backgrounds. Capitalize on your existing business, community and academic networks. Consider participation from your existing group of professional service advisors, since they should already be familiar with many of the issues your organization faces.

While it is nice to gather with friends and admirers, you want to capitalize on outside experience, skill sets and perspectives. Be sure to consider individuals outside your existing networks to gain expert, independent advice and ways to approach new challenges and opportunities.

Consider recruiting a high-profile industry executive or community leader as a foundational board member.

Consider the attributes that will most likely allow members to advance the board’s goals. In addition to qualifications based on experience and technical knowledge, be sure to look for people who are sufficiently independent to offer constructive advice and sufficiently discreet to keep sensitive information confidential.

Network with entrepreneurs in a similar industry, or those with a reputation for success across a variety of business environments. Engage in frank discussions with selected targets and ask how they view your business. Successful executives are often eager to share their perspectives. If you like what you hear, maintain the dialogue and, when the time is right, ask how they feel about joining your board of advisors.

Structuring the Advisory Board

Despite the informal nature of an advisory board, it is important to provide structure. That helps set expectations for the company, the board and its members.

Once the board achieves a critical mass, it should meet regularly, by phone, in person or some combination. Individual members should be appointed for a specified tenure that does not strain their time commitment. One-year terms might be appropriate when confronting, for example, identifiable short-term technology issues, however two-year terms typically offer more value-add.

These short terms also provide flexibility for the early-stage enterprise to address evolving business environments by modifying the board composition as needed.

The board should be large enough to offer critical expertise in your current business environment, but small enough to allow for productive meetings, advice generation and evaluation. It is also important to distinguish between an advisory board and a network of (even less formal) advisors whose knowledge you may tap from time to time.

Setting Expectations

When recruiting board members, be clear about how you want to engage them, and make sure the candidates are aware of the associated responsibilities, time commitment and term of engagement. For family businesses and other early-stage companies, prospective board members should be aware that private information may be discussed and that a confidentiality agreement might be necessary.

As your business evolves, you will confront new challenges and opportunities. You should therefore consider a periodic review of the advisory board’s objectives to determine if the member composition should be modified, and you should have a framework for transitioning board members as the need arises.

Compensation

Advisors should not expect significant compensation, and family-run/early-stage companies want to minimize ownership dilution; therefore, try to avoid offering stock grants to advisory board members. It has become common to pay advisors for their service based on an agreed hourly rate and a defined monthly time commitment. Advisor compensation becomes more valuable as the business valuation improves, and as the enterprise matures, the compensation framework can be modified. After all, you are asking for advisors to help increase enterprise value.

Interacting with the Board

Ensure that management and each advisor take the board commitment seriously. Establish goals and expectations for the board and its members. Strive to hold regular meetings, not just with the entire board, but with each member. Develop agendas for each meeting. Ensure that all members are well prepared for discussions and that they each commit to attend the meetings. After all, the value of an advisory board is in gaining outside perspectives, observations and advice.

Since your board members are essentially volunteers, be mindful of their time and make sure they feel appreciated. You do not want valuable board member mumbling, “Why did I agree to this?” Keep interactions as brief as mutual calendars allow. Consider structuring most board member interactions on a 1:1 basis while meeting with the entire group less frequently.

Initially, the owner/ CEO will need to chair the advisory board to ground what will be a disparate group and set direction for the board’s activities. However, as the business matures, board and member dynamics settle in, you may feel comfortable having a board member serve as chair.

Conclusion

As with many things, the more you put in, the more you get out. A carefully cultivated advisory board that participates in well-conceived discussions focused on critical business issues can yield significant dividends for a family business or early-stage enterprise.

To read the first article of this series entitled: Creating Value Through a Board of Advisors – The Benefits for Entrepreneurs and Early-Stage Companies click here.

Our attorneys offer guidance and counsel to closely held business owners including the value of building an advisory board. Please call our offices at (781)235-5500 or contact us to learn more about how we help businesses from formation through succession planning.

This article is not legal advice and should not be taken as such or relied upon as legal advice.

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