John Knotts | President and Owner of Crosscutter Enterprises — Your Success Incubator.
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One of the loneliest jobs in business is that of the senior leader of a company—an owner, president, managing director, CEO, etc. The person at the top often must shoulder all the risks of the company, and they have very few people they can rely upon for advice and insight. Therefore, many smaller businesses build an advisory board.
Where a board of directors is a very formal entity that votes on business issues and bears legal responsibilities, an advisory board is much less formal.
New and smaller businesses can reap great benefits from having an advisory board. Advisory boards usually have some vested relationship with the company, and thus they bring a great deal of knowledge and expertise to a business.
The biggest value of an advisory board is to identify risks that the business leadership is unaware of.
The biggest question I get when sharing this concept is, “How do I build an advisory board?” Although less formal than a board of directors, there still is some structure to the creation and management of an advisory board.
Step 1: Documentation
The first step to building an advisory board is to document the specifics of the board’s purpose, its size, when it will meet, who will be on it and how the board members will be compensated. In a sense, you can think of this document as a less formal set of bylaws.
Typically, the purpose of an advisory board is to regularly review past performance, study strategic direction and provide unbiased advice and insights based on knowledge and expertise.
Most advisory boards have three to five members. They are typically made up of equal members; unlike a board of directors, there are no chairs, presidents, vice chairs or vice presidents. The members all have equal rank and voice. Three to five is usually the most effective size because if there are too few members, you do not get a broad range of advice. However, if you have too many members, this can make the board unwieldy and expensive.
Many advisory board members for nonprofit organizations will volunteer for free. If the company is a for-profit business, I believe it is bad form to benefit from the board’s advice and not compensate the members. Advisory board members should be compensated for their time. However, compensation should not create a bias for the members. I recommend $200 to $500 an hour for each board member. Also, all board members should be compensated the same. Inequities in compensation create an unofficial rank structure, which you do not want on your board.
Step 2: Selecting Board Members
The most important considerations when selecting board members are knowledge, experience and diversification.
Knowledge and experience are not a surprise. You are building this advisory board to provide your business with advice and insight based on knowledge and experience. Look to expertise in business ownership and business coaching. When it comes to business owners and leaders, seek people from noncompetitive markets and industries. Again, you want to avoid any bias—if a board member sees you as competition, they may not always be forthright with guidance.
The biggest challenge is diversity. Do not bring in a bunch of board members who all look and think like the business leaders. Diversification includes regular things like age, gender, race and national origin. But also consider creating a board that is diversified by experience as well. Consider nonprofit experience, military service and government office involvement as possible ideas. Your biggest risk when building an advisory board is bringing in your mirror image. It may make you feel more comfortable, but you are missing the point.
Step 3: Conducting Board Business
Initially, you want to bring the new board up to speed. Hold a full-day meeting where all the time is spent on history and strategy. Be ready to answer a lot of questions. Write these questions down because new board members will need their own onboarding in the future.
In my experience, an advisory board normally meets every quarter, soon after your company has its quarterly planning session. If you only meet biannually or annually, then the board meeting should be soon after those planning sessions.
The annual meeting of the advisory board is normally a half- or full-day event. It starts with the past performance of the last year (maybe up to the past three years), changes to the company’s strategic direction and the annual plans for the following year. The second half of the annual meeting is to dissect issues, challenges and risks that the board members see with any strategy changes and the annual plan.
Quarterly (or biannual) meetings are normally shorter. Progress for the year to date is reviewed, and the next quarter’s plan is discussed. Discussions are more specific on tactics for the next quarter.
While I've seen that advisory boards normally meet every quarter, senior business leaders may tend to also have monthly meetings with each board member individually. These monthly meetings could occur over coffee, lunch or dinner. This is another reason that you do not want to have too many members on the board.
It is smart to have at least an annual social event with your advisory board—maybe a holiday event or a nice dinner. To develop a stronger bond with your advisory board members, consider making this a family event.
Prior to any advisory board meeting, you want to send out read-ahead material so that your board members are prepared appropriately for the upcoming meeting. Also, ensure that you have all required materials printed and placed professionally in binders. Ensure that when you bring these board members in for a half- or full-day event you have appropriate food, drinks and refreshments.
An advisory board can be a low-cost yet effective way for business leadership in smaller organizations and startups to identify and deal with risks that they may not be aware of. Additionally, the board members bring excellent assistance in ensuring that you are running the most efficient and effective organization possible.
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