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Are you having trouble putting together an advisory board?

07 March 2011

It could be because you are asking them to fulfill the wrong role

Many CEO's of small and mid sized private businesses are embracing the concept of an advisory board but are having trouble sourcing people who are prepared to take on the role. One of the most significant reasons for this, I believe, is that confusion abounds as to whether, and how an advisory board is different to a company's board of directors. It's an important distinction to make, so here's a quick look at the difference between and advisory board and a board of directors and why it's so important.

Way back in the day, when the ownership of businesses first extended from the boss to a wider group, the shareholders would meet with the boss to check that he (for they were exclusively men in those days) was doing a good job. As the number of shareholders expanded this process became unwieldy - imagine a hundred guys turning up to quiz the CEO - so instead the shareholders appointed a small group of directors to do the job for them.

Fast-forward to today and the role of director is still essentially about protecting the interests of shareholders but it is steeped in legal obligation. And these obligations are onerous. No room here to delve into the detail (a good source of that is the Australian Institute of Company Directors www.companydirectors.com.au) but essentially the directors have an obligation to keep on top of everything that's happening in the organization and be across all the big issues. Furthermore for a director of a business that is financially precarious the obligations become very serious. Get it wrong and the director himself could become liable. A common misconception is that this doesn't apply to non-executive directors. Ouch, it does.

 

So this is why when the CEO of an owner managed business approaches a couple of potential \"advisors\" and asks them to be on his board, the ones that are worth their salt don't exactly leap at the chance. On the most part the \"advisors\" realize they are being offered little in the way of financial compensation to accept a decent sized bundle of risk. Of course this makes no sense to the business-owner because as far as she is concerned she runs the business, owns it, and wants to appoint a couple of directors to help her grow the business. That there are such legal ramifications seems bizarre.

 

The answer for you as an owner-managed business is to make it clear that you are looking for an advisor not a director. In fact for the avoidance of doubt I suggest you steer well away from the word \"board\" altogether and use a phrase such as \"advisory panel\".

 

So your advisory panel is a group of people you select on the basis of their ability to be a sounding board, a springboard for ideas, and a source of special expertise. In essence it's the group of people with whom you can have a good old honest chinwag about the business with the expectation of getting some good old honest wisdom back in return.

 

To get the best out of your advisory board you will want to meet with them regularly and often, define clearly what you expect from them and understand what they expect from you. I'd put it in writing and be explicit that their role is as advisor to the CEO/ management team not as director of the business. I'd also ensure that the definition of the role rules out any possibility of them being a shadow director (another technical term which you can find on the AICD website but is essentially a person who acts like a director but isn't formally appointed as one).

 

You can be particular about which areas you would like the involvement of your advisory panelist - if you have a marketing expert on your advisory panel it's perfectly fine to just speak to them just about marketing. This is quite different to the example of a marketing expert on your board of directors who would need to be kept abreast about the whole business irrespective of the area of their expertise. This is not to say you shouldn't involve your advisory group in the whole of the business - it's often more advantageous to do so - it's just that neither you, nor they, are obliged to be.

 

If you are growing a business a fantastic way of tapping into much needed expertise is to put together an advisory panel, and you will find that those experts are much more willing to be involved if it's clear that you are not expecting them to become directors.

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