Get on board Featured

8:00pm EDT September 25, 2008

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 doug.houser@firstmerit.com.