Private Company Directors

When Is an Advisory Board the Best Fit?

Is your organization thinking about forming a board for the first time? As a potential board candidate, are you considering whether to join an advisory board or a “real” (fiduciary) board? Having served on both types, I have come to appreciate that choosing the board type is really an issue of situational needs and best fit from both a company and a candidate perspective. There is little debate on whether effective, high-performing boards of either type add to improved business performance and long-term value enhancement for companies. In times of transformation, a broader board experience base can be valuable if harnessed in the most effective manner.

Here are some foundational considerations for choosing the advisory board path.

Your board journey

Knowing where you are and where you want to go in your board journey is at the core of the advisory/fiduciary decision for both an organization and a board candidate.

As an organization, you may be in a period of change,  in terms of both the business itself and the evolving roles you play as management and owners or “management-owners,” perhaps due to a generational change in a family business. You should assess your comfort with “outsiders” and crystallize what you need in terms of substance for your situation. You must get clarity on what you want from the board and the degree of involvement you desire.

As a potential board member, you should always understand what drives your highest satisfaction, as that will be the most critical ROI element for your time and energy. Is it the prestige of being a board member, is it the potential for financial rewards or is it the satisfaction of making a real difference to the company you serve? Is an advisory board role a steppingstone or résumé builder, or is it something you really want to do?

Risk elimination

Advisory boards bring much less risk to both the management-owners and the board members of privately held businesses, leading to clearer business-building focus and less potential tension. One often expressed concern about adding truly independent members to a fiduciary board is that you might lose control as management-owners. Sometimes this is addressed by just having one or two independent board members, but then you may be limiting the upside of a fully formed, majority-independent fiduciary board. A more complete and robust advisory board with no voting authority can simply eliminate this risk from a company perspective, giving the business valuable expertise and substance.

For an advisory board member candidate, having no legal accountability for management performance oversight, governance compliance or critical decisions (like mergers & acquisitions) brings efficiency in focus and minimizes any conservative bias in deliberations. It is good to know you can contribute freely without the hesitation of risk aversion. Mind you, this is not an elimination of risk or risk management in deliberations or less responsibility to offer your best thinking. It is really just a fresher, unencumbered environment for contributing to the discussion. This can be both professionally compelling for the individual and potentially game-changing for the company.

Deep dive invitations

You’ve heard the old saying “Noses in, fingers out” as it relates to the boundary setting and potentially disconnected relationship between management and boards. There are many stories of fiduciary boards going too far into management’s realm and, in some cases, not far enough. If formed and run well, an advisory board can add huge value to problem solving and business improvement. In the best cases, management invites the advisory board to do a deep dive with them into a key issue, with detailed facts and concerns fully on the table. Sometimes this is done with the complete candor of “We don’t know how to handle this, and we want your deep dive review and perspective before we decide.” You won’t hear this in a fiduciary board meeting.

For an advisory board member in this environment, deep-dive advising can be very fulfilling if you are an engaged problem solver and willing sharer of best practices for business improvement. Knowing that you are fully welcome, that your questions are not viewed as criticism, that your input is accepted without reservation and that you are fully appreciated can be a special experience. How often have you had this experience as a fiduciary board member, no matter how collaborative the culture is? Being “under the tent” while really moving things ahead has its rewards.

If a company selects the advisory board modality as the best fit for its needs, and you’ve been able to recruit the right, egoless independent advisory board members you need, here are some key dos and don’ts to be considered.

Do
•          Establish consistent advisory board participation, including having the advisory board members fully joining in on the regular “insider” fiduciary board meetings. Treat them like board members without the vote. This can be especially valuable if your fiduciary board members are all management-owners, as is the case in many family businesses. For advisory board members, prepare and contribute as you would if you were a fiduciary board member.
•          Be selective about who joins the independent advisory board, with particular attention to assessing motivation, fit, experience and skills. Remember, advisory board members will need to have the power of persuasion, since they lack the formal or legal authority of fiduciary board . For advisory board member candidates, accept this special role with conviction.
•          Pay respectfully and competitively (without the board member risk premium). You will easily get an outsized ROI if you follow the first two do’s. For advisory board members, understand that you will never get paid enough so your rewards have to come from the service itself.

Don’t
•          Treat the advisory board as “free consulting.” These specially selected advisory board members are engaged, self-motivated and committed, so use them wisely.
•          Put your current professional advisors (e.g. accountants, lawyers) or business friends on your advisory board. You are seeking independence.
•          Make the advisory board too large, particularly if you really want to engage with it. Make it a robust working group.

Your board journey is exactly that — a journey. In many situations, the right advisory board setup is a great fit for both the closely held company and the committed candidate, driving both business success and personal satisfaction.

Don Yee has been CEO or an independent board member of numerous companies, from startups to multibillion-dollar businesses. He currently serves on the boards of Blue Diamond (a 2018 Private Company Board of the Year), Aerometals, Jake’s Finer Foods, Fat Family Restaurant Group and NACD-Northern California, where he is the founding chair of NACD-Capital Valley and an NACD Board Leadership Fellow. He is also a member of the Private Company Director editorial advisory board.


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