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Apr 24, 2009 -

A small business needs help dealing with issues as the business grows.

One of the best sources of help is an Advisory Board.  This is not a financial oversight board.  It gives advice. The owner can take the advice or ignore it; use part, some or all of it.

But how do you form an Advisory Board?  What’s involved?  Who should be on it and why?  Do they get paid, and how much?  How often do they meet, for how long?  And will this make more work than it’s worth?

All good questions - let me answer them:

How to form an Advisory Board?

First decide what kind of help you want/need.  Financial or legal knowledge?  Industry or product/service expertise?  Or the many other kinds of help to deal with the issues a small business encounters?

Next, start small. It’s easier to add people than to remove them.  It’s not “legally” hard to remove them, but it’s delicate, since these were likely people you valued for some reason. You don’t want this to end badly.

An Advisory Board of three people is a good place to start.

It can expand later to 4, 5, or 6, but more than six “advisory board members” for a small business is too many. As your business grows or expand, the advisory board can grow and expand with it.

You need a charter.

To form an Advisory Board, start with drafting a “charter.”  What do you want the board to do?  How will it work?  Shorter is better, just covering the basics for now.  BUT, your lawyer should be involved to make sure yours covers the right legal points. You can always change or add to the charter, because it’s “your advisory board.”  Do not skip this step. It will make you think about issues and legal points you must consider at the start-topics like terms of board members, frequency of meetings, compensation (if any), and liability/indemnification.

What does the Advisory Board do?

An Advisory Board’s primary function is to “advise” the business.  But on what?  A meeting agenda can list the areas where advice/input is needed.  To be respectful of board members’ time and avoid long, boring meetings, put times on each section of the agenda.  Use these to limit discussion and move to a new topic. It’s OK to “table an issue” (keep it on the list to discuss) or “continue it” (carry over to the next meeting).  This provides time to think about the issue, and decide if, how and whether it should even be on the next Agenda.

Typically, the company (owner or management) starts with a brief update on the status of the business and then goes on to describe the topic, problem, opportunity or question, and provides some idea where the company (and s/he) stands on it now. A short list of possible approaches might be included, with comments on which are favored.  The opening should specify if this is an information exchange and comments are welcome; if it is a question where possible answers are desired; or just an update on the topic.

What are some typical topics to take to an Advisory Board?

Investment decisions: You want to buy a major new piece of equipment that will make the company better in some way.  An Advisory Board can ask good questions and offer independent opinions about the advisability of either going into debt, or spending some precious capital you already have on this kind of investment.  Some decisions are irreversible, so get all the help you can on them.

People and “structure” decisions: You want to hire (or fire) key people.  There is a right and a wrong way to do both. There are also good and bad reasons, and thought processes to follow.  Since people decisions are usually central to the competency of the company, it’s good to get advisory board input.  The same goes for changes in the structure of the company, its organization, its facilities, etc.

Who should be on the Board and why?

An Advisory Board consists of people whose expertise will “give valued input, honestly.”   If there’s no intent to pay Advisory Board members make that clear up front when recruiting them.  A “volunteer board”  may be OK, but “free advice” may only be worth what you paid for it.   It’s a better idea to pay, even if it is a modest amount. (Consider the time-value your advisory board members are giving up to spend them with you.)

Advisory Boards have many benefits.  First, there’s an inverse learning curve for board members.  With time, they become more knowledgeable about the company.  Second, people will often serve on Advisory Boards for lower fees than they’d want as a consultant.  An important point is to not take advantage of Advisory Board members, especially in professions like law and finance, where advice can be binding and carries risk.  It’s OK to ask for an opinion, but not a binding judgment.  That is what they get paid to do.

Many executives and professionals, especially recent retirees, will serve on an Advisory Board for less than they’d charge for their services.  Why?   The Board’s Meetings are scheduled well in advance; are considerate of their schedules; usually last for less than a full day; and often have a social or recreational activity included.

If they get paid, how much?

Board fees can vary from as little as $100 each, to as high as a few thousand dollars per person, per meeting.  Some Advisory Boards pay annual retainers, and attendance is expected, but there is no separate meeting fee.  Others pay only for attendance; still others combine the two: a fixed annual retainer plus an additional stipend for each meeting attended (preferred, assuming you want to consult them on some issue between meetings).  Some Advisory Boards offer stock participation based compensation.  Travel expenses are usually reimbursed by the company, except for short, local auto travel.

How often do they meet and for how long?

Advisory Boards typically meet 2, 3 or 4 times per year, usually for 3-5 hours depending on the amount of content, scheduling around meals, etc.  Meetings can be good times for board members to visit company offices and facilities.  If a company is fast growing and has many topics, 3-4 meetings are better, since they provide more continuity.

Is this something that makes more work than it offers help?

No.  Preparing for Advisory Board meetings does take time, and good preparation usually yields good meeting results.  The prep time is directly related to how much information the owner wants to share, and what the agenda topics are.  Advisory Board members should also sign Non-disclosure Agreements, ensuring that company confidential information is not disclosed inappropriately.   In return they should receive written indemnification from liability concerns.

How is this different from “big company boards?”

In larger companies, especially with public ownership, the Board of Director’s role takes on added significance, as the company falls under SEC (Security and Exchange Commission) regulation. Typically a large company board has more members — 7 to 15 is a normal range-and has separate committees to handle Audit Oversight, Compensation Policy, and Strategic Planning.

A big-company board of directors is a much less “consultative,” and a much more “governance” oriented group. It has fiduciary responsibility (for financial decisions and their outcome).  It also has oversight responsibility to make sure management is not acting in an illegal or ill-advised manner. Larger company boards’ primary job is to watch out for the interests of the shareholders-who cannot sit in the boardroom (they usually do in a smaller company). Smaller companies typically neither need nor want this level of board control.

There you have it.  Find a few knowledgeable people, with complementary areas of expertise and create an Advisory Board.  Mix the areas of expertise based on need: Financial or Legal, Sales & Marketing, Product or Technology, or even an Academic person (expert in the area needed).  Define how they will work together; clarify compensation; set meeting dates well ahead of time, and respect board members’ time.

Properly done, an Advisory Board can be a valuable part of building a successful small business-and a way to get concerned, expert advice at a reasonable cost.

Additional reading about Small Business Advisory Boards:

About the Author: John L. Mariotti is President and CEO of The Enterprise Group — Time-shared Executive Advisors. He was President of Huffy Bicycles, Group President of Rubbermaid Office Products Group, and now serves as a Director on several corporate boards. He is the author of a number of business books on Partnerships, Marketing and Strategy.  His latest book, THE COMPLEXITY CRISIS was chosen as one of 2008’s Best Business books.  His electronic newsletter THE ENTERPRISE is published weekly.   His Web site is www.mariotti.net.