In the current highly competitive and challenging economic times that most businesses face, a strong advisory board can be particularly helpful in navigating ever-changing and sometimes complex marketplaces.
“A growing number of our closely held business clients are using outside advisory boards to assist them in evaluating strategic issues affecting their businesses,” says John F. Schlechter Jr., director in the Audit and Accounting Group at Kreischer Miller.
Smart Business spoke with Schlechter about the role of a strong advisory board and the benefit of gaining perspective in a complex business environment.
What is the difference between an advisory board and a board of directors?
The advisory board functions somewhat differently than a more formal board of directors. The exact role of a board of directors is sometimes detailed in corporate bylaws, which will typically vest the board with more formal responsibilities, such as voting rights in certain decision-making and looking out for and protecting the interests of shareholders or other stakeholders.
The advisory board is typically less formal, and its roles and responsibilities can be tailored by management to fit the company’s needs and expectations. As its name indicates, the role is more advisory and support-oriented, as opposed to having voting and decision-making responsibilities.
What are the typical roles of an advisory board?
The primary role of a typical advisory board is to help management think through and develop the strategic planning for the business. Advisory board members should challenge management’s thinking as to the organization’s strategies and direction, and provide ideas and creative out-of-the-box thinking in regard to the company’s challenges and opportunities.
Oftentimes, owners and management can be so intensely focused on and consumed by the day-to-day activities of the business that they miss opportunities or fail to see sometimes obvious solutions to the business’s challenges. An advisory board can often help management ‘see the forest through the trees’ because its members are not emotionally connected to the day-to-day problems and issues surrounding the business.
It’s common for advisory boards to meet quarterly, and for a formal agenda to be developed in advance of each meeting. Agenda items may include a review of financial results and budgets, an analysis of upcoming capital expenditures and financing alternatives, an update on strategic initiatives, and a review of current challenges and opportunities impacting the business.
What qualifications should board members have, and how many members should there be?
Fewer than five advisory board members typically is a good number for small to medium-sized businesses. Too many thoughts and opinions can sometimes be distracting and confusing, so owners do not want to have too many advisory board members.
At the same time, you want to have enough members that you can get some diversity of skills and backgrounds to help provide a broad perspective.
Generally speaking, you want board members who are trustworthy, who will take a vested interest in wanting to see the company succeed and who will provide open and honest feedback. Many advisory board members have a business of their own, or otherwise have strong business backgrounds. It is often helpful if their experience has been with companies of similar size, or perhaps slightly larger, which helps them understand the typical trials and tribulations currently being experienced by the owners.
Obviously, board members with sharp, creative minds can be a real asset.
It is always helpful to have at least one member who is very familiar with the industry or marketplace in which the business operates. While that member does not need to have worked in the exact same industry, a professional who has worked in a closely related business or industry can be extremely helpful in an advisory role.
Having a member on the board with a financial background is also advantageous. Other backgrounds that can be helpful include marketing, legal and operational. Choices should be tailored to the specific needs of the business.
What should companies avoid when selecting board members?
Family and friends are not a good choice as advisory board members, generally speaking. The advisory board needs to be unencumbered by personal relationships so they can provide open and honest feedback.
The board should also be as diverse in experience and skills as possible. Having too many like-minded board members often will be a limiting factor to obtaining a broad advisory perspective. Having a domineering board member can also be a detriment, as the individual may inhibit others from sharing their point of view.
The best advisory boards are made up of accomplished and confident individuals with personalities that complement each other.
In these ever-changing and challenging times, an advisory board can be a powerful tool to provide a broader business perspective and strategic direction.
John F. Schlechter Jr. is a director in the Audit and Accounting Group at Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.