The main reason to create an advisory board is to seek expertise outside of the company. Advisory board members should provide the company with knowledge, understanding and strategic thinking of the industry or management of the company. Companies should seek advisory board members whose qualities complement the existing board of directors and not mask gaps in knowledge or skill in the main board.
An advisory board strengthens the existing board, but does not interfere with authorities of the existing board. There are two key questions to be asked when creating and operating an advisory board. The first question is who is trying to achieve what from an advisory board.
The second question is how the business of the board should be conducted. The following issues need to be addressed. The type of advisory board members should be determined by the nature of what is sought and expected from them by the enterprise. Advisory board members should have distinctive knowledge on different aspects of business such as marketing, product development, sales techniques that are of use to the directors. Eventually, it could result in a waste of resources and time for the enterprise and the advisory board members.
The advisory board must determine what the focus of the committee is, whether it is a broad focus or a narrow one on a specific product feature.
Exit & Succession Advisory Board
Individuals in an advisory board should share a common goal or similar interests. Size of an advisory board influences the efficiency of delivering ongoing information and effectiveness of organizing board meetings. A large advisory board may result in managerial issues. Therefore, it is recommended that an advisory board begin with the advisory board leader, and grow from a fairly small size to its ultimate number.
Group dynamics suggests the maximum size for an advisory board is eight members, which takes into account of the need for enterprise people and other facilitators at meetings. A fixed meeting should be held regularly monthly, annually or other and advisory board members must be well informed of the purpose and background information of the meeting in order for them to provide valuable advice. A corollary should be provided to advisory board members, which should be of an appropriate length, organized, comprehensible and informative.
While it should be concise, it should provide enough details to provide advisory board members a suitable foundation for them to advise on the business. Confidentiality of the information discussed in the meeting shall be considered. A skilled facilitator, administrator or corporate secretary is required to organize schedules of advisory board meetings and meeting materials. The facilitator or chair of the board should be committed and aware of time management for the meeting. An agenda could improve the organization and time management for the meeting.
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Advisory board members could be appointed to specific terms i. Term of membership is also important when it comes to expansion of the board; term of membership ensures that the size of the advisory board remains efficient and manageable. Advisory board members serve an enterprise for a range of reasons, from personal loyalty to direct compensation. Multinational companies have local companies running their business in a particular foreign jurisdiction for lower costs e.
However, giving authority to an outside group of directors in the local company may increase risks and instability of the multinational corporation. Since an advisory board can operate in a different location, with different cultural and business norms, in a different language, multinational companies may choose to have an advisory board instead of a localized board of directors in order to avoid loss of control. Companies may choose to have an advisory board before they have a board of directors. The development of an effective board of directors requires a group of individuals with good chemistry and has the combination of appropriate skills to propel the business.
Having an advisory board allows companies to assess the commitments and capabilities of each individual and observe the chemistry between them before appointing them to a board of directors. A large board of directors may grow to an unmanageable size where organizational complexity and communication breakdown may occur, leading to ineffective and inefficient function of the board. A smaller advisory board, without the complexity of authority involved in board of directors, may work more effectively compared to a board of directors that grows in size as the corporation grows.
The complexity and speed of enterprises often make it difficult to seek advice on any particular topic. Enterprises may also find building trust in any person or group to provide on-going and meaningful guidance difficult. An advisory board can then provide the degree of consistency, longevity and background knowledge as advisory board members provide reliable advice on particular issues.
Advisory board members receive compensation for committing to their positions. This gives incentives to advisory board members to provide quality advice and ensure that a request for assistance is taken formally. The board of directors assesses the CEO and establishes his or her compensation. While an advisory board may induce change in the company for the benefits of the company, a board of directors inducing change in the company could suggest a lack of confidence in the senior management team. This imposes great pressure on senior executives and could become a barrier for senior executives to express their issues and seek advice from the board.
Directors and Assistant Directors are still required to bring any changes to policy or financial matters to the board for direction. No directors or assistant directors are to make any changes without board approval. An enterprise may need advice on a particular aspect of its business such as marketing, product direction, customer service or contact network expansion. While board of directors need to take into account of all aspects and go through a series of administrative proceedings e. The drawbacks of having an advisory board instead of a board of directors may include the following:.
An advisory board deals with a more narrow range of issues and meet less often than board of directors. There is less commitment for advisory board members compared to directors in the board.
This is reflected in the lower compensation advisory board members receive as compared to those in the board of directors. Nevertheless, the compensation for advisory board members depends on various factors, including return of investments, time, organization and cost. Board of directors is exposed to a variety of legislated liabilities, fiduciary and other duties. Responsibilities include unpaid wages, unpaid taxes, environmental damage, etc.
How to Create an Advisory Board for Your Business
Care must be taken to avoid confusion at the boundary between advisory board and board of director activities. An advisory board, particularly one in a public company, must not be allowed to usurp the responsibilities and authority of the directors.
An effective advisory board, providing non-binding but informed guidance, can be a tremendous ally in the quest for superior corporate governance. A board of directors has ultimate supervisory responsibility for all of the affairs of the enterprise. An advisory committee can have such a broad focus or a narrower one that focuses on a specific product feature. It is important to determine what the focus of the committee should be. For instance, Algorithmics Incorporated, of which I am Chairman of the Board, is a world leader in enterprise risk software solutions. The company includes individuals who are skilled in software development, mathematics, financial engineering and risk analytics.
Algorithmics determined that it would like to expand the breadth of advice beyond what its nine-member board of directors provides. It had to consider whether the advisory board proposed to achieve this should be drawn from one area of interest or across as many as all of these areas. Ultimately, the company determined that what it wanted most was the benefit of customer and potential customer input on product and market direction.
The individuals most able to provide this would be executives charged with enterprise risk management responsibility. These people often competed against each other, but all would share an interest in providing suitable risk management underpinnings to their businesses.
THE ROLE AND VALUE OF AN EFFECTIVE ADVISORY BOARD •
This commonality of interest might help to ensure that the group would be pleased to get together once or twice a year with the CEO of Algorithmics. The company considered an advisory board that would also include people with skills in software development, mathematics and financial engineering. It also determined that the interests of risk managers might be different enough from the interests of others that the kind of interaction hoped for in the advisory board might not materialize.
Algorithmics decided that if advice was required in any of these additional areas, it might make sense to establish other advisory boards comprised of individuals with similar interests only.