Have you ever made a major life decision, such as buying a house or starting
a family, without consulting the opinions or advice of trusted individuals in your
life? Do you feel more confident in your decisions if you have discussed all the pros and
cons with an expert or even a confidant?
Most people would agree that discussing
such personal life decisions is helpful and
may even guide them down a better path.
The same holds true for decisions one must
make for one’s business. Thus, every business should have an advisory board to hold
discussions and help make such decisions.
“An outside advisory board is assembled to
provide counsel and outside expertise to the
owner,” says Doug Houser, senior vice president with FirstMerit Bank. “It should provide
invaluable advice and fresh ideas to help the
owner reach his or her goals.”
Smart Business spoke with Houser about
the value of an advisory board to privately
held companies and how business owners
should develop such a board.
What is the risk for a privately held company
if there is not an advisory board?
The greatest risk is that the owner becomes
too narrow in his or her thinking in pursuit of
his or her goals for the business. It is not likely that one individual can consider as many
variables as a well-rounded group of four or
five people could. By tapping the broad range
of experiences of an advisory board, there is
a more sound and reasoned evaluation of the
decisions facing that owner. Ultimately, the
same conclusion may be reached, but
through this consensus, the owner should
have an even greater confidence of success.
Privately held companies may overlook
this need because the owner feels if he or she
started the business he or she knows it better
than any outsider and is entitled to make all
of the decisions. This may not be the most
effective way to run a business.
What value can an advisory board add to a
company?
The greatest return that an advisory board
provides is simply enhancing the value of the
business — to the community, its associates
and, of course, the financial return to the owner. Just as with a public company, the
advisory board should provide some perspective from each of these viewpoints.
The existence of an advisory board is a signal to employees that the owner is willing to
be challenged and consider a broader range
of ideas. This should tell any potential
employees that their voice will be heard, as
well. This may help attract and retain valuable employees.
How should the advisory board be formed?
The form of the advisory board can take
many shapes. Some boards may be less formal and consist of trusted advisers already
employed by the company. They may not
have formal meetings, but rather are consulted as needs arise. Any business trying to
achieve significant growth in an industry that
currently has significant volatility should
have a more formal structure. They should
convene regularly at quarterly meetings with
a prepared agenda to address.
The board should be composed of individuals with exposure to many businesses,
including that specific industry. You want to
bring the broadest experience base and a
sense of good and bad practices to the table.
It is critical, however, that the owner makes it clear to the advisory board that it needs to
challenge the company and provide critical
thinking. Alleviate any potential conflict.
On what aspects of the company and operations should a board provide advice?
Primarily the focus should be on strategic
direction and management/succession.
Strategic direction is a catch-all but can be
characterized primarily as an evaluation of
risk and return.
The two issues that have effectively killed
the most closely held businesses are rapid
growth and a lack of succession planning. An
advisory board should evaluate the effective
allocation of capital. Most importantly, do not
stretch too far too quickly so as to risk the
farm. The advisory board should ask, ‘Where
is the business achieving its greatest return?’
Capital should be deployed in those segments. Do not be afraid to abandon a certain
strategic direction/segment simply because it
is a legacy portion of a business. Second, the
advisory board should be comfortable challenging the owner in an attempt to create
depth in its team.
Why are business owners hesitant to implement an advisory board?
There are typically three reasons: financial
information disclosure, time commitment
and openly having their decisions challenged.
With regard to financial disclosure, advisory board members should be expected to
sign confidentiality agreements. In terms of
the last two issues, it is easy to argue that the
return on this investment of time and strategic review is overwhelmingly positive if done
the right way. No matter the merits of the advisory board’s views, the owner always maintains the right to overrule and remove the
advisory board — it is the owner’s company.
If you are an owner, it is crucial to do your
research and commit fully to the concept as
the return will be tremendous. If you are an
existing or potential associate of a closely
held company or a center of influence, know
that the presence of an advisory board will
give the business a far greater likelihood for
success going forward.
DOUG HOUSER is senior vice president with FirstMerit Bank. Reach him at (614) 545-2770 or [email protected].
