What is an Advisory Board, Why You Should Have One and How to Build Yours

According to the Advisory Board Centre State of the Market Report, there are at least 1.3 million advisors operating within an estimated 434,000 advisory boards worldwide. So, what is an Advisory Board and how are they beneficial for your business moving forward.

What is an Advisory Board?

An Advisory Board is a formally constituted group of independent people who provide high quality, objective advice to business owners in areas of strategic importance. Unlike the board of directors, the advisory board does not have authority to vote on corporate matters or have any legal or fiduciary responsibilities. A company calls upon the advisory board only when they seek advice; the purpose of the advisory board is not governance, but to provide the leadership team with the advice to help the business address business and growth challenges. 

Although the overarching focus can sometimes be loosely defined, advisory boards help with specific aspects of a business that the current board would benefit from. This can range from marketing advice to fundraising, to recruitment, to strategies for growth etc. Inherently the role of board advisors is not to make decisions but rather to provide expertise and evidence to increase the confidence of the decision maker.

Advisory Boards often help businesses adapt to a changing business environment, for example: according to a Wall Street Journal article, 50 of the Fortune 500, including General Electric, American Express, and Target, set up digital advisory boards, typically consisting of six experts under the age of 50.

Why should you adopt an Advisory Board?

Advisory Boards are an often-under-utilised resource for strategic, high-value information and guidance. Considering the pace of change and complexity in today’s business environment - external guidance could be the difference between making the correct decision or falling behind.  

Advisory Boards can:

• Bring a wealth of networks and resources
• Hold directors to account, ensuring efficiency of performance
• Ensure a board avoids groupthink
• Assist with priorities and focus on big picture issues
• Use their experience to alleviate pressures around big decisions
• Allow a business to address the realities of operations and changing circumstances without any loss of control
• Help a company adapt to different cultural and business norms and perhaps different languages
• Provide expertise on technical and complex topics
• Provide safe harbours for executives who want to test options before they are forced to be more definitive and assertive before a board of directors

Louise Broekman, CEO of the ‘Advisory Board Centre’, explains: “A formalised Advisory Board is a simple and powerful management tool. Its inherent flexibility allows the board structure to shift to meet the needs of the business, making the model a compelling instrument for strategic thinking and independent evaluation.”

Examples of when companies decide they need an Advisory Board:

It’s important to know when it is appropriate to create an Advisory Board. Below are some typical examples of scenarios when an Advisory Board might be of maximum benefit to a company:

• Guiding start-up companies in a rapid growth phase
• Creating a new product line
• Moving into a new market segment or industry
• Moving into a new geographic area
• Making the transition from private to public and perhaps listing on a stock exchange
• Restructuring and repositioning a company in the market
• Implementing major new technology within the organisation
• Staving off a serious competitive threat
• Analysing a potential takeover target
• Advisory boards may also be needed, as a practical matter, in certain deal structures. For instance, investors in limited partnership vehicles may require a voice in business operations, to bridge the gap.

Interestingly, according to a report by the Advisory Board Centre, 74% of businesses appointed an advisory board to assist with growth strategies. This potentially highlights just how important and valuable Board Advisors can be in assisting businesses to grow and scale.

Meanwhile, a 2014 Canadian study, by the Business Development Bank of Canada (BDC) polled over 1,000 small and medium-sized enterprises (SMEs) to reveal that only 6% of SMEs had access to an advisory board, but of those that have an Advisory Board, 80% indicated that they’d set up an advisory board again! 

How to create and Advisory Board:

Depending on its specific purpose, an Advisory Board can have a broad focus or a narrower one. It is important to make some important decisions:

• Who do you want to sit on the advisory board?
• What are the terms of the membership? 
• Will the board offer informal advice or more structured, formal advice?
• What is your meeting frequency and structure?
• What is the mandate?
• What are the primary topics of the focus of the board?
• How long will the original board be in place before you reassess?

Selecting the size of the advisory board, the selected expertise at the table and the style of the relationship between the board and your business are all essentials. Once these issues have been decided upon, you are ready to begin the construction of your advisory board. 

After sourcing and recruiting your candidates, you will need to finalise contractually. Don’t be afraid to set targets and goals - successful advisory boards are clear about their purpose. It’s worth working out your general ideas of the ROI of the board.

Supposedly, if judging by the behaviour of large corporations, the annual compensation paid to advisory board members is generally under half the package paid to regular board directors. A global survey conducted by the Advisory Board Architects (ABA) found that 15% of private company boards paid no compensation, 25% paid only cash, 43% only equity, and 17% paid cash and equity. 

A business may draw upon an advisory board to strengthen its understanding on a myriad of topics, An advisory board creates value by exposing the management and the main board to new thinking, thereby broadening horizons, improving understanding of a company’s markets, risks and future drivers of growth, challenging assumptions and helping businesses avoid the perils of groupthink. 

With a clear mission and the right composition, a board of advisors can be a powerful, value-adding asset in a changing business environment.

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