The Use and Value of Advisory Boards

The Use and Value of Advisory Boards

An alternative to the fiduciary board, advisory boards can provide expertise and advice to the private company’s owners and management.

  The advisory board—as distinguished from a fiduciary or statutory board—can be a very useful form of governance for the private or family-owned company, and can often be the first step toward the creation of a fiduciary board. Without giving up any control, private and family business owners can use an advisory board to help compete more effectively, create stronger strategies, mentor family members and executives and more.

  In today’s increasing globalized business environment, according to Susan Stautberg, President of PartnerCom, “if you’re going to win, you need the best talent. You can’t have your father’s board anymore. You have many skill sets that are needed to succeed—visual and social media, strategic planning, innovation, talent mentoring, global branding, supply chain management and now cybersecurity. Those skills sets are not necessarily the ones that your parents had so this is the opportunity to bring on the skill sets you need.”

  At the Private Company Governance Summit 2014, Stautberg, along with fellow panelists Harold L. (Hal) Yoh, III, Chairman and CEO, Day & Zimmermann; Jack Ouellette, Executive Chairman, American Textile Company, and Darcy Howe, Advisory Board Member, The Bama Companies were led in discussion by moderator F. Douglas Raymond, partner at Drinker Biddle & Reath LLP.

  “But why not have a traditional board?” asked Raymond of the panelists. “Some people would say that one of the advantages of a fiduciary board—maybe the only advantage—is that the directors have more skin in the game because they have these fiduciary obligations and they are more committed. So you’re going to get more of their attention and maybe better thinking out of them.”

  “Our advisory board doesn’t pass resolutions or take votes,” answered Hal Yoh. “At the end of the day you have to get great advice from your advisory board members. And you have to take it. My advisory board members are very good and very wise people.”

  “The cool thing about an advisory board is that we can be the utility players for the company,” added Darcy Howe. “With an advisory board, you hire people with good skills and an open mind. So the advisory board adds value to the company without the owners giving up control.”

  Jack Ouellette lists several advantages to the private and family-owned company in having an advisory board. “The first is executive development. We’ve gone through succession planning and having the younger guys now running our business at advisory board meetings now for several years has been enormously instructive. In addition, having some of our other executives come in to present to the board is very useful as far as the succession planning for them, as well as having them understand the importance of their own roles.”

  Additionally, Ouellette noted that an advisory board who can observe family interaction and dynamics has been helpful in getting an outside perspective on how to deal with inter-family conflicts. “We work smarter as a result of having an advisory board. Smaller businesses are oftentimes completely overwhelmed by taking care of unimportant and not urgent business. Our advisory board helps us to work on important issues and they make us want to be a better company.”

  Advisory Board Composition

  American Textile’s advisory board consists of seven members, including three independent advisors (C-Level executives at companies larger than American Textile), the father and his two sons (chairman emeritus, President/CEO and EVP, respectively) and Jack as Executive Chairman. The company’s CFO and attorney also attend advisory board meetings.

Jack Ouellette, Executive Chairman, American Textile Company: “Our advisory board helps us to work on important issues and they make us want to be a better company.”

 

  “We established the board twenty two years ago,” noted Ouellette. “It was the father who decided to do this. His oldest son was coming into the business. And he wanted an advisory board to help sustain the business and make the succession work, to help mentor his sons as they came into the business.”

  Hal Yoh started his advisory board right after his father retired. The board has seven members, including the former CFO of the company, a family business owner who serves as lead director, a retired Air Force General, a former aerospace & Defense executive, a former professional services executive, an author and business owner, and Hal himself. The board “advises me on business matters, as well as reviews and approves any Yoh family member for director-level or above jobs at the company to bring some objective meritocracy to family hires. The advisory board also consults with the Yoh Family Business Council on succession and governance, and works on ad hoc special projects such as a new voting trust and shareholders agreement.”

  The Bama Companies’ advisory board was formed in 2010, to advise CEO and sole shareholder Paula Marshall. “There are a lot of people who wanted a piece of Paula,” recalled Darcy Howe. “Whether it was someone in her community, her business, her family or out of the blue. She really needed team of a few people around her who weren’t there to get something from her, but to help her.”

Darcy A. Howe, Advisory Board Member, The Bama Companies: “The advisory board adds value to the company without the owners giving up control.”

 

  Bama’s board consists of the CEO and four advisors, including a packaging entrepreneur and long-time family friend, the former non-family CEO, a quick service restaurant executive and Howe, who has experience in liquidity events and the capital markets. Also attending advisory board meetings are two senior VPS, each of whom runs the company’s largest customer relationships, and the CFO. Interestingly, Bama’s advisory board will eventually become a fiduciary board in the event of the CEO’s death.

  Who’s on Board?

  In all three cases, these advisory boards feature outside executives from related industries who can bring valuable perspective to the company’s owners and leaders. “There’s no approved solution as to how you should comprise or make up your board,” noted Ouellette. “We chose three highly ranked individuals from companies that really fill the gaps in some of our core competencies—logistics, M&A and diversification and marketing. Because we have advisors from companies significantly larger than ours, they’ve seen all kinds of things. We were doing a bank syndication and were a little timid on how we would approach the bank. Our advisers just came in very strongly and told us how we should get aggressive and it worked.”

  “Invite people onto your advisory board that are not only going to help your company get where you want to go next, but who can also help you get where you want to go next,” recommended Susan Stautberg. “Do you want to be seen as an industry leader, someone who can go on a company board? Invite the CEO of that company onto your board. You can invite people from bigger companies onto your board. You can invite retired CEOs from major companies. Why? Because they still want to be in the deal flow, still want to be active. One of the hottest trends these days is these digital and social media advisory boards. Obviously digital and social media is so important to a company—it can get you very embarrassed very fast but you need usually people in their late twenties or early thirties to be able to provide the advice. So with a digital and social media advisory board you can bring in these young hot shots in.”

  The number of people you should have on your board “depends on the skill sets you need,” advised Hal Yoh. “If you’re looking for seven skill sets, can one person do three? But if you make the advisory board too small, you’re not going to be able to get the diversity of thought you need. On the flip side, you’re dead in the water if you have too many advisors.”

  Added Ouellette: “I’ve seen advisory boards work starting with just one person you trust and respect. And one of the agenda items becomes how do we get additional good people on our board? It’s better to do a good plan today than a perfect plan next week.”

  This approach was used in the formation of the Bama advisory board. The CEO hired an outside consultant who helped but the board together, and who attends the board meetings. “The consultant calls us after the board meetings,” said Howe. “And the consultant helps us set agendas for future meetings. I think it’s wonderful to have an advisor helping with board meetings.”

  Stautberg added some additional advice. “When we create an advisory board for a company we make the appointments for one year terms. We do that for a couple reasons. One is that it’s a lot easier to get top talent when you say you don’t have sign on for three years and if you want to leave at the end of the year you can.

  It’s also more flexible for the company because one year the advisory board can be helping resolve a crisis and the next year helping you go into a new part of the world, and the third year you may be buying companies, so you rotate the people on and off as you need them.”

Susan Stautberg, President, PartnerCom: “Invite people onto your advisory board that are not only going to help your company get where you want to go next, but who can also help you get where you want to go next.”

 

  What to Pay?

  “The big difference between an advisory board and a corporate board is there’s no fiduciary or legal responsibilities, which means that it’s a lot more fun,” said Stautberg. “You don’t have to pay people as much—we do advisory boards for some big global companies and they pay up to sixty thousand dollars a year. But smaller or family companies don’t have to pay that at all. We’ve done some advisory boards for companies that only pay $500 a meeting, but they give advisors free product. People are really coming onto advisory boards for the intellectual capital—what they’re going to learn—and for the social capital—who they’re going to meet. And then there’s the creative capital, when the ideas bounce off each other and you get all kinds of ideas you wouldn’t have had.”

Harold L. (Hal) Yoh III, Chairman and CEO, Day & Zimmermann: “I quite honestly don’t even look at the cost. I look at the value I receive.”

 

  American Textile pays its advisors $12,000 a year, and will be increasing that compensation, but used to pay advisers $4,000 a year. “So I think that you can start with the premise that someone would do it for free,” said Ouellette. “You don’t want to do that. But if you are asked to be on an advisory board for a worthy company, would you do it for free? The answer is probably yes.”

  Day & Zimmerman started out paying advisers a $6,000 retainer and $500 a meeting. Currently, advisors to the company earn a $30,000 annual retainer. “I quite honestly don’t even look at the cost,” said Yoh. “I look at the value I receive.”

  Darcy Howe noted, however, that “I’m paid more on my advisory board than I am on my fiduciary board. But that’s because our CEO wants us to be a fiduciary board down the road and she wants us to see everything in the company globally, so we went to Poland last year, we’re going to China this year. Because she really wants everyone around the globe to know her board and for us to know the business. Like Jack was saying, I would have done it for nothing, because I love doing it. I don’t want to run a business anymore, but I love being involved.”

  Added Doug Raymond: “You want to pay enough so that your advisors feel badly if they don’t do the work, but not so much that they’re interested more in the money than the opportunity to contribute.”

 

  Day & Zimmermann Advisory Meeting Schedule and Agenda

  Day & Zimmermann has five advisory board meetings a year. In February, the board’s agenda is a year-end review and review of plans for the coming year. The next meeting focuses on a deep dive on one business unit of the company. “We bring in the business people as well as their direct reports and then have a conversation about where we are in in that business unit.”

  The third meeting, held in June, involves the company’s owners and focuses on issues related to G4, and the voting trust. The fourth meeting brings together all of chairman Hal Yoh’s direct reports for a review of the company’s three-year strategy. The final meeting, held in December, focuses on preliminary budgets for the next year and an in-depth talent review, going through the strengths and weaknesses of leaders three levels below the chairman.

  A typical Day & Zimmermann advisory board meeting agenda focuses on several areas: safety, diversity, a financial update, various key issues, and then a private session between the advisors, with Yoh out of the room. Afterwards, Yoh and the lead advisor will debrief on the meeting and set the agenda for the next gathering,

  American Textile’s Advisory Board Lessons Learned

  Jack Ouellette, Executive Chairman of American textile Company, lists five lessons learned from running an advisory board:

  1. Painstaking planning precedes a potent powwow.

  “If you’re the person planning advisory board meetings, it does take an awful lot of time. I’d like to submit to you that the planning time is almost as useful as the actual board time.”

  2. Local advisors are easier to reach.

  “We found that bringing people in from Dallas, Chicago and New York was a little bit cumbersome. All three of the independent advisors live in Pittsburgh, where the company is headquartered. And it really is very helpful—when you have a particularly pressing issue, you can go to lunch and get a lot of things done quickly.”

  3. Come clean with the dirt.

  “When we were first doing the advisory board, we didn’t talk about ‘the dirt.’ But it is enormously helpful when it comes to a family business for advisors to know the real situation within the family, because they can offer advice outside of the meeting on how to deal with touchy issues.”

  4. Tackle the tough tasks—seek advice, not admiration.

  “When we first started our advisory board many years ago, it was a dog and pony show and we were telling everybody how smart and how are capable we were. You know that’s not true. And so we finally learn to seek our advisors’ advice.

  5. We know our business best, but we don’t always know what’s best for the business.

 

  “Having advisors from other businesses with unique perspectives has provided us with enormously insight into our own business.”