How to Create an Advisory Board for Your Business
In this article, we explore 1) what an advisory board is, 2) types of advisory boards, 3) functions of an advisory board, 4) how to create an effective advisory board, and 5) the conclusion.
WHAT IS AN ADVISORY BOARD?
An advisory board is a group of select people who are retained for the sole purpose of providing strategic advice to a business entity. The role of an advisory board is non-binding and informal in nature. In most cases, the advisory board may consist of people drawn from various walks of life, with diverse capabilities and expertise in various areas of a business. Businesses may wish to have advisory boards so they can utilize the expertise of the advisors and enhance their business capability. Advisory boards provide valuable inputs to business structuring and management, and may also provide the latest industry news. They offer guidance and advice on operations, legal matters, finance, manufacturing, organization and the competition to benefit the business.
Advantages and disadvantages of having an advisory board
An advisory board is beneficial to a business, especially a startup, when the business owners do not have much experience in running a business or wish to have a better understanding of a process. They can benefit by aligning themselves with experts in the field and learning through their advice. Since the board consists of people from various professions with expertise in diverse fields, their combined advice and help can make a marked difference to a business.
It can help a fledgling business by identifying business opportunities and strategic partnerships with other businesses, which can be a great boost to any business. It also helps in developing a business strategy for the business by providing direction.
One of the biggest advantages of an advisory board is that it provides a fresh perspective by looking at the business from an unbiased point of view and identifying strengths and shortcomings of business policies that the owners/management of a company cannot often spot.
The advisory board often complements the board of directors by filling in any knowledge gaps. Sometimes, it may be constituted even before the board of directors itself. The advisory board can work as a springboard for the induction of a board of directors, providing the business owners an opportunity to observe the advisors and assess their chemistry and capabilities before inviting them to the main board. The advisory board is also more efficient as the number of people on the board can be contained and changed without much hassle. It helps the executives to test out their ideas without fear, as the board is there to advise and not to govern. This means less stress and tension for the executives. Having a stalwart of the industry as an advisor for a company provides great leverage for a startup. It builds up the credibility of the company as the reputation of the expert helps the business he/she is advising.
Even though the advantages far outweigh the disadvantages, an advisory board has its own drawbacks. The most important one is that it has no fiduciary responsibility or legal liability and can sometimes provide advice that may not be totally safe for the business. The other disadvantage is that a member of the advisory board is not an employee of the company and may work for little or no compensation. This can often lead to a lack of commitment. It is common for a person to be on many advisory boards of different companies, and this can create a conflict of interest, especially if it is an industry expert who is well sought after by other businesses in the same line of work.
Finally, the success of an advisory board depends a lot on the people that constitute it. Thus, it is incumbent upon the owner of the business to choose the members carefully.
Does your business need an advisory board?
If you are wondering about the usefulness of an advisory board, then you should stop worrying. They are essential, and more so in the initial stages when there are gaps in a business’s knowledge bank. It is difficult to find people for all the key positions and also the companies may not be able to afford such personnel initially. Hence, it is better to look for an advisor who would provide guidance to the team without getting full-time pay. Establishing a strong advisory board and utilizing it well may often mean the difference between failure and success. Naturally, the decision for whether or not a business requires an advisory board is based upon different criteria for each enterprise. Virtually any company or business may benefit from the perspective and wisdom of an experienced collective of outside advisors. Such a group enables a CEO to have mentors, a sounding board, and the space to share the successes and the problems of business operation with objective individuals, thus making the top a less lonely responsibility. As cited in research, the predominant reason in creating a board of advisors is to induct external expertise into the company. Other key reasons are as follows:
- Every CEO or entrepreneur needs help to refine a business plan or a product idea.
- Advisory boards supplement the core competencies of an enterprise, thus avoiding any dilution.
- Experienced advisors help you to avoid mistakes, or make negative business decisions.
- Your advisory board may concentrate on a specific task, thus it becomes a simplification asset.
- Interested advisors become advocates for the business, which translates to access to capital.
- Competitive insight means advisors increase knowledge regarding potential competitors.
- Advisory boards help in making key decisions when researching and launching products or services as well as refining business plans.
TYPES OF ADVISORY BOARDS
There can be many different types of advisory boards based on the expertise of the members or the purpose for which they have been created. Some advisory boards include:
Science Advisory Board (SAB)
A Science Advisory Board is comprised of people who are experts in any field of science. You will generally find scientists, doctors, technologists and researchers on SABs. Their duties are to advise the organization about the scientific impact of an action. Such boards are often associated with environmental agencies, the United Nations, etc. Almost every biotech enterprise has an SAB, and they can be extremely valuable in helping to shape a portfolio or program, even to raise the visibility of a startup.
Medical Advisory Board (MAB)
Generally, the members of an MAB are prominent scientists and luminaries in bio-medical research institutions, who constitute the principal advisory group for the scientific programs of an institute, pharmaceutical or medical research organization. Other MABs may be populated by physicians and medical experts, though this naturally depends on the nature of the entity being advised. Typical roles of an MAB may include advising on the long-term strategy of an institution for achieving its goal of promoting biomedical research and science education or overseeing proposals for future research and grant programs.
Technical Advisory Board (TAB)
The TAB is normally established when there is need for technical advice. Technologists, innovators, and field leaders in technology normally populate this board. The purpose of the board is to provide guidance regarding implementation of technology policies of an entity, which could be a government agency or a technology firm, in order to develop cutting edge technological products and services.
The contact network of technical and technology advisors is very different from that of business advisors, and therefore may or may not match with the introduction the entity seeks. Before engaging a TAB member for the purpose of accessing their network, ensure it is the right network.
Content Advisory Board (CAB)
A CAB may be required, for example, in a publication, a magazine, an online portal, blog or broadcast outlet. The board is comprised of industry figures who contribute expertise, guidance, and knowledge to the print magazine, digital publication, or broadcaster’s editorial staff. Drawn from the relevant industry, these individuals can ensure that an outlet meets the requirements of its readership or viewership by authoring articles, producing webinars, critiquing current content or advancing story ideas and topics for future coverage.
Startup Advisory Board
The two most likely reasons a startup would create an SAB are firstly, for ‘advisory value’, i.e., the individual being invited has experience and knowledge and therefore may act as an advisor to your startup. Secondly, SABs are helpful for ‘brand value’. The target individual has ‘brand’ and thus credibility. By inviting that person to an advisory board, one logically hopes that some of their credibility will rub off on the startup.
If the startup has a high degree of technical complexity, then it may well require a brain trust to help to get a product out the door and also turn around technology issues. In this case, individuals with great expertise but perhaps less brand value, may be the order of the day.
Fundraising Advisory Board (for non-profit companies)
Fundraising advisory boards are often a positive way to rejuvenate the energies of a non-profit organization’s advancement and leadership experience. They can help to give clarity and focus regarding where the organization is heading and how it will actually arrive there. Opportunities are expanded for attracting new talent, perspective, and participation with members who are honored by the invitation and eager to contribute. Such advisory boards may consist of socialites, wealthy individuals with a bend towards philanthropy, social and charity workers of good standing within the community, events managers, finance experts, etc.
Programmatic Advisory Board (for non-profit companies)
Programmatic advisory boards can be formed if a non-profit has perhaps mostly wealthy members who view their role as primarily fundraising, yet have scant experience of those issues in which the non-profit is involved. Most of those board members are neither well-connected to the low-income client population, nor are they experts in the primary work of the non-profit. The programmatic board is composed of low-income clients, social workers and others who are experienced in the programs and are qualified to collate information and feedback on the non-profit programs.
FUNCTIONS OF AN ADVISORY BOARD
There is no empirical rule as to how an advisory board must operate. It may meet irregularly, provide high-level and long-term strategic insight; or its function may be like that of a business development consultant, seeking to create introductions, to open doors and to generate new leads.
Successful advisory boards are sure about their duty. Clearly establishing and communicating the roles and expectations of the advisors and articulating their mandate and purpose is crucial. Some features of a typical mandate may be:
- Advising on a specific aspect of business such as product direction, marketing, contact network expansion or customer service.
- A board may consist of customers and prospective customers who contribute insights into product development and marketing issues.
- Developing an understanding of the specific business and marketplace, and gauging future trends while providing timely knowledge about competitors, upcoming political, regulatory and legislative developments that could have an impact of the company.
- The owners, directors or management may raise issues and seek objective advice and creative thinking from the board, regarding a new strategic position.
- Offering the directors and management insights and practices which may only be possible to observe at a distance from the daily operations, thus helping to see the operations afresh with an open mind.
- The board may be general in scope or focused upon a specific industry, market, or issue, thereby supporting and encouraging the adoption of current business ideas such as the inculcation of cutting edge technology, or the decision to go global.
- Acting as a resource for executives who can present their ideas and strategies to the board for their advice and feedback.
- Encouraging, without stifling the vision or spirit of the founders, the development of a framework of governance that facilitates continued growth.
- Actively monitoring the performance of the business to improve business and subsequently challenge the management and directors to consider options for the same.
- Helping the executives think outside the box. Advisors who are familiar with different geographies and hail from different intellectual disciplines regularly provide keen insights into key economic and geopolitical challenges.
HOW TO CREATE AN EFFECTIVE ADVISORY BOARD
Creating an advisory board is not very difficult once you have decided that you need a board of advisors. Here is a step-by-step process for creating an effective advisory board.
Step 1: Define the purpose and the goals of your advisory board.
The first thing to do before forming an advisory board is to critically assess one’s own area of knowledge to discover where knowledge augmentation is required. Once that has been identified, then the entrepreneur should start looking for people who will fill the gaps and provide valuable inputs. Having advisors at the startup stage is very useful as you can forgo hiring executives whom you have to pay a salary in favor of advisors, who needn’t be paid up front, but work for an honorarium or share in the company.
Step 2: Look for doubters (and leverage your network to find the right members).
While looking for the right experts to advise you, look for people who know their work and have the gumption to tell you to your face what they feel about a particular matter. Outspoken and bold people will give you sound advice and will not be afraid to stand by it. Such impassioned advisors are your company’s best friend. While you may be tempted to avoid people who give harsh feedback, you need to understand that these are the advisors who are likely to be the most honest. So instead of avoiding them, you should recruit the doubters.
Finding the right members may seem like an uphill task, but if you look in the right places you will find them. Take advantage of your own network to find the right people to populate your board. Since such people are familiar with you, they may be more willing to fill the spot. In case, you cannot find a person with the desired qualifications, ask your personal and professional network to give you references for people who might fit the bill. It is essential that any potential advisor be genuinely willing to help an entrepreneur and there should be a positive relationship between the two of you.
Step 3: Select the right people for your advisory board.
Selecting the right people is the key to an effective advisory board. The composition of the board will depend on an organization’s priorities and goals. One may not be able to create a comprehensive advisory board in one broad stroke.
Although it is prudent to establish diversity on the advisory board, it is equally important to have dedicated and committed advisors who will ensure the stability of the business. When considering the composition of an advisory board, the company should decide what skills and experience rightly belong there as foundational, and what type of minds could add their input as creative catalysts.
It is recommended by experts that you not ask professional advisors, such as accountants, lawyers, and bankers, to participate, unless your strategy is dominated by their fields of expertise. Alternatively, consider finding advisors who are in full-time jobs and yet are intrigued by the approach. It is preferable to have an advisor who is not earning a living from your business. It is also preferable to induct a board that does not include family, friends, or anybody with an emotional stake in the enterprise.
Make sure that the advisors you choose are sharp and experienced while also keen to share. Moreover, they should dovetail with the personalities in the room, including your own. The key features to look for in an advisor are:
- A strong personality and not afraid to give honest feedback.
- The skills that they have and how they will be utilized for the benefit of the enterprise.
- A commitment to the development of the enterprise.
- A degree of mutual trust and respect.
- Someone who knows their subject and commands respect not only for their knowledge but also their personality.
Step 4: Structure your advisory board (forget the size and focus on the expertise).
While creating your advisory board, it is essential to pay attention to quality not the quantity. You don’t need many advisors; you need advisors who are experts in their fields. Naturally it is vital to articulate a clearly defined purpose for an advisory board or group. If there is no clear-cut vision behind the structure of the board, it may lead to confusion and ineffectiveness. At the beginning, when developing it, you must answer some basic and pertinent questions:
- Who would you like to see on your board?
- What would be the size of the board?
- What will be your focused objectives?
- How can you construct an agenda that supports your objectives?
- What expected outcomes are envisaged?
- How will success be measured?
- How will the board meet: when and for what duration?
- How will you compensate the board?
Not everything will be clear at the outset, however after an initial meeting or two with the advisory members, the goals will be clearer and the roles of each member defined. It is essential to have a free-ranging discussion of possibilities, evaluation of ideas and prioritization of objectives to determine the ways to utilize the available resources of the advisors. It is incumbent upon the enterprise to design an experience for the advisors that is stimulating and well-organized; this will help ensure that members feel that their advice is valued and applied.
Step 5: Communicate your expectations to the members of the advisory board.
The entrepreneur is obliged to communicate the value that he wishes to derive from the advisory board. You will do well to communicate to the members what it is that you expect from them as advisors and what value you are seeking from their inputs. It is about expectation and context. The value that members can add is commensurate with what the advisory board needs and aspires toward. Ultimately, it is a question of where their specialty lies and the particular skills they bring with regard to that expertise. For some advisors, one may be happy to simply have their name on the web site, like a patron, while for others, you may wish to consult with them regularly.
Step 6: Appreciate and compensate the work of your advisory board.
Members need to be compensated for their time and advice. This needs to be done in a manner that is neither a big burden on the company nor too little for the board members to feel underpaid. You need to consider the value an advisor brings to the table when determining compensation. Some advisors may be honorary members and may not demand compensation beyond having their name prominently associated with the company, but these are few and far between. Others like to be paid for their time and expertise. So, if your business is up and running, then show respect to your advisors and compensate them. If you are paying your advisory board, you will be more likely to take the advice proffered more seriously and prepare better for the meetings.
It is highly likely that any person you induct onto your board as an advisor is a busy and sought after person. So you need to provide some value in return for time spent counseling and finding solutions to your problems. This is not an easy task as advisors are paid for results. They are not paid for their inputs; they are remunerated for their outputs.
Some companies prefer to give a percentage of the equity, if they find the advisor invaluable to them. This ensures that the advisor is duly compensated, and his/her interest in the company is stoked as the profitability of the company is of personal benefit to them. This is better than paying in cash as, if one pays in cash and wants that service repeated, then a repeat payment will need to be made to the advisor. If however, the advisor’s service is remunerated via equity, then the payment is one time only, but the business keeps getting the service ad infinitum. Equity can be a reward for service that keeps on paying the business dividends. The shareholders may own the company, yet the company also owns them.
Step 7: Ask for honest and direct advice and maximize the valuable advice from your advisory board.
There has to be a degree of honesty and openness in the board. Frank and honest opinions matter a lot, and you should be able to handle opinions if you wish to improve your performance. Ask them to identify the problems and then give you an honest evaluation and solutions to the problems. Encourage the advisors to share the mistakes they made in getting to their positions as experts, so you can avoid those mistakes and learn from their experience. In order to get valuable advice from your advisors, you have to know what you want from them. You have to put forth questions for them to answer, find scenarios for them to offer solutions, involve and inform them in your business. The more they see of your business the more they will be able to offer by way of useful advice.
Step 8: Meet or communicate regularly with your advisory board (using a traditional set up of meeting in person, conference call, or other methods).
Once your advisors are on board and ready to be of service, the board members should be prominently featured in all your corporate profiles. You need to communicate with them regularly, and follow through on the stated commitments. They should have information regarding the latest developments in your business. This can be facilitated by emailing all relevant reports to the advisors. Sometimes, you may need to communicate with a certain member of the advisory board for a specific reason; you can facilitate this by inviting the member to a meeting, either in person or through phone calls, or video conferencing. This can take place anytime that you need the services of the advisor.
Experts say that an advisory board should meet at least once every quarter. There are some companies who like to convene their meetings more often. There is no set rule for the scheduling of meetings, each business should examine their own needs and decide upon the timing and the venue, and give advance notice to the board members so they can ensure attendance.
The board meeting must aim to be result-oriented. The meeting minutes must be collated and circulated to the company’s top management and should preferably include the recommendations of the panel regarding key issues.
Step 9: Keep your advisory board up to date.
Keep your advisory board members informed of the company’s activities in between the meetings. It would be wise to send copies of the monthly financial and operational reports to the advisors, so that they are kept up to speed on how the enterprise is progressing. This also helps the advisors in spotting any problem areas that they can discuss during the next meeting. The fact that the members have agreed to be on the board implies strongly that they do care about the welfare of the company. If they are consistently updated on the goings-on of your enterprise, they will be of greater value to you.
Step 10: Respect the input and advice from your advisory board, but fire the members who bring no value.
It is essential to respect the time that the advisory board spends on addressing your problems. If you are not willing to execute the advice of a board of directors or an advisory board, then it is better not to establish one. In giving a commitment of their time, the greatest disrespect to any board is to take that time and do nothing with it. Not only will one’s credibility dissolve with that board but also with any future board members too. You are not obligated to accept all the advice given by the advisory board, as it is not a statutory body, but you are obligated to give due thought to the advice and then accept or reject it.
But also, you cannot squander company equity with unproductive advisors. Waste no time on advisors who will not return your telephone calls, attend meetings or put forth any worthwhile suggestions. An advisory board has no place for bad advisors. It is best to find a way to let them go without too much fuss. To this effect, you may even consider creating short-term agreements with advisors regarding specific deliverables, akin to a typical consultant contract. If the advisor performs, then renew the contract. If no performance has been delivered, then let it fizzle out.
ADVISORY BOARD VS. BOARD OF DIRECTORS
The board of directors is a statutory body that has a legal obligation and acts as a fiduciary for the shareholders. They simultaneously monitor the organization and its management to impart their duties as fiduciaries toward the shareholders. If required, company directors can, and often do, replace a CEO.
Conversely, advisory boards, as a consultative group, may be created, sustained or dissolved at the discretion of the company CEO. Advisors do not have any power to wield, let alone to instruct executives or direct an organization.
Advisors are usually a useful asset for the main board to challenge its own assumptions or policies, particularly regarding a specialist skill or technical matter. Members can focus upon and occasionally challenge research and intelligence work carried out by the enterprise.
Proper structuring of a board of company directors or advisors is an important element to determine the success of an enterprise. The members of both the boards are people upon whom the business relies to vote on key decisions, or for inspiring strategic direction. It is essential that the role of each board is understood, and thus correctly established.
You may consider having a board of directors if you can abide by the requirements that are legally entailed with a statutory board. When there is a legal imperative, directors have a deeper and broader sense of responsibility to the stakeholders, and to the health of the company or institution, especially in an emergency.
Advisory boards provide slightly less benefit than a board of directors. Many long-time small-business advisors constitute a board of directors. An advisory board can give its best advice without worrying if that advice is going to come back and bite them. This certainly does change an individual’s perspective.
The advisory board is a mechanism that offers long-term guidance. The main point of an advisory board is to garner expertise from outside. Advisors should provide knowledge, understanding and strategic thinking to an industry or the management of a company. Whatever their role, advisory board members must also be utilized for the value of their network.
‘Advisory service’ differs from an advisory board, as this offers short-term guidance, by payment. Startups regularly require advisory services to guide them in establishing a business. Guidance is usually required at the outset. Hence, short-term help that provides services relating to the development of a business plan and financial projections can be invaluable. The goal of advisory services can be to assist the startup entrepreneur with the materials and requisite knowledge to raise funding while also ensuring that the business simultaneously grows its product and clientele.
Subsequent to the initial phase, some advisory services help startups to induct advisory board members by utilizing their existing contacts with professionals. As a startup, you may want to begin with an advisory service rather than a full-fledged board.