How to Build and Utilize an Advisory Board
(Shortened for printing from an Article Authored by Patrick E. Donohue of Toptal Finance – toptal.com)
NOTE: Private Directors Association of Colorado suggests you avail yourself of additional information on how to build a “high impact” advisory board by going to Advisoryboardarchitects.com and clicking on Contact Us.
The Private Directors Association, The Bailey Program for Family Enterprise, and the Liniger Center on Franchising both at the DU Daniels College of Business do not subscribe to the effectiveness of either of the two firms shown above.
ADVISORY BOARDS
Advisory boards are undoubtedly controversial. The truth is that advisory boards are usually not silver bullets. Still, they can be powerful tools and yield strong ROI if executed properly.
At its simplest, advisory boards are groups of subject matter experts providing a company's leadership team with guidance on company vision, innovation, risk management, and profitability.
• The research found that annual sales at businesses with advisory boards were 24% higher than those at the control group. Productivity was also 18% higher for those with advisory boards.
• According to a Wall Street Journal article, 50 of the Fortune 500, including General Electric, American Express, and Target, have set up digital advisory boards, typically comprised of six experts under the age of 50.
Economics of an Advisory Board
• Compensation. Per advisory board best practices, the company should always provide something whether it be paying for meals, travels, an honorarium, or even offering equity at some juncture. Startups should pay $100 to $500 per meeting, host a meal, and cover any incidental costs.
• In large corporations, the annual compensation paid to advisory board members is normally between a third and half of what's paid to regular board directors.
• A global survey conducted by the Advisory Board Architects found that 15% of private company boards paid no compensation, 25% paid only cash, 43% only equity, and 17% paid cash and equity.
Signs an Advisory Board would add value to your company
• There's a specific objective and internal resources are not equipped to execute. A company with specific needs such as making an acquisition, selling the company, entering a new market, or raising capital can benefit from an advisory board.
• The company would benefit from positive association. Advisors typically have impressive track records that corporations want to affiliate with. When a company showcases its advisors, it demonstrates that it's surrounding itself with key opinion leaders and that these leaders are invested in their success.
• The leadership team has skill gaps. If the company cannot justify hiring fulltime employees, advisory boards can provide perspective it's not getting internally. The most common needs are in accounting or finance.
Building an Advisory Board
• Identify your needs. Identify what the company needs to achieve with an advisory board. The more specific, the better a measurable strategic outcome is ideal. Figure out how these goals are tied to mission, vision, strategy, and milestones.
• Draft job descriptions. The company needs to draft written profiles of ideal candidates. Once the profiles are written, then an advisory board job description can be drafted for recruiting and informing candidates on roles and expectations. Prospective board members should not have a pre-existing relationship with the company or its management team.
• Source and recruit. Don't hesitate to do cold outreach with candidates unfamiliar with the company and don't be overly concerned about waiting for the right moment. Only after engaging with multiple candidates should a decision be made. Make sure to thank the candidates who were not selected and let them know that you would like to stay in touch.
• Finalize contractually. When candidates agree to join as advisors, it is important to have them sign a job description or a memorandum of understanding. While advisory boards can be fairly informal, utilize formal documents to set the tone and demonstrate the seriousness of the board.
• Set key performance indicators. It is important to work towards milestones, and measure outcomes against KPIs
Advisory Board vs. Board of Directors
Advisory boards and boards of directors (BOD) are often confused with one another. The crucial distinction lies in fiduciary duty, the legal responsibility to act in the stakeholders’ best interest via a construct of specific duties. While the BOD has the responsibility to influence corporate governance, advisory boards do not
Another key difference is lifecycle: while a BOD exists in perpetuity, an advisory board is episodic. Advisory boards can be ongoing, but they typically have a defined lifespan
Economics of an Advisory Board
Compensation for Advisory Board Members
A global survey conducted by the Advisory Board Architects (ABA) found that 15% of private company boards paid no compensation, 25% paid only cash, 43% only equity, and 17% paid cash and equity. Though the survey includes data from both fiduciary and non-fiduciary boards, the CEO of ABA indicated that most respondents were from advisory boards and that the compensation breakdown is in line with what they have seen for advisory boards. Interestingly, their surveys have found that boards paying only equity have the lowest impact. This is counterintuitive to the widely held belief that equity participation provides the strongest alignment with achieving key corporate objectives. The survey also found that the boards with the most impact were paid cash and equity.
A Quick Word on Equity
Matters become more complicated when it comes to offering equity, something that’s debated extensively. For an established company, equity makes little sense since they can pay in cash. However, a startup may be tempted to offer a few percentage points in exchange for access to big-name advisors. Founders should tread lightly here. It could be a red flag if an advisor insists upon a large stipend or a decent chunk of equity immediately. In situations involving equity, I recommend that advisor relationships start out in a honeymoon phase, with equity available only after the advisor has provided tangible value and vested upon specific milestones.
Tips on Building and Utilizing an Advisory Board
Step
1: Identify Your Needs
The first step in the plan needs to identify what the company needs to achieve strategically with an advisory board, i.e., a measurable strategic outcome is ideal when you’re setting up an advisory board. You will also need to determine if the time and expense of organizing an advisory board can provide a substantial positive ROI.
Step 2: Draft Job Descriptions
Next, the company needs to draft written profiles of ideal candidates. It’s important that each of the profiles is unique, with a high bar of qualifications. A highly functioning advisory board will have a diverse set of views where the advisors can learn from one another.
Step 3: Source and Recruit
Prospective board members should not have a pre-existing relationship with the company or its management team these people are essentially already informal advisors! Do not be reluctant to reach out to candidates unfamiliar with the company. In Utilize your address books and referrals to reach out to candidates and strike up a dialogue.
Step 4: Finalize Contractually
When candidates agree to join as advisors, it is important to have them sign a job description or a memorandum of understanding. While advisory boards can be informal, it is important to utilize formal documents to set the tone and demonstrate the seriousness of the board
Step 5: Set Key Performance Indicators
Finally, it is critical to set objectives and key performance indicators (KPIs). It is important to work towards milestones, measure outcomes against KPIs, and swap out members when they are no longer a fit. In my interview with Bob Arciniaga (Advisory Board Architects) he noted his distaste for the term “sounding board,” stating, “There are much cheaper and easier ways to get feedback than trying to get a group of advisors together. The primary purpose of an advisory board should be to drive outcomes.”
Mistakes to Avoid
A haphazardly assembled advisory board can become a liability.
• Don’t list the member on materials without approvals. Under no circumstances should an advisory board member be listed on promotional materials without the advisor formally accepting the position.
• Don’t under-communicate. It doesn’t take much for an advisor’s uninformed or outdated comments to reflect poorly on the company. Always err on the side of overcommunication early in the relationship and when there are shifts in strategy.
• Don’t ruin the relationship by letting tasks fall to the wayside. If you tell an advisory board member that you’re going to do something, make a priority to get it done.
• Don’t let the relationship fester. Advisory boards should have a stated lifecycle tied to a key outcome. Otherwise, advisory boards can become directionless and a waste of your time.
Parting
Thoughts
The most valuable asset of every founder and/or CEO is time. While the cost of an advisory board can be a significant budget item, it often also requires a substantial time commitment. If you are going to put together an advisory board, it has to be done right.
Understanding the basics
• Are members of an advisory board paid?
While professional advisors suggest stipends in thousands per meeting and equity upside, others looking to “pay it forward” often insist a cup of coffee is adequate. The truth lies somewhere in the middle
• What is the role of the advisory committee?
At its simplest, advisory boards are groups of subject matter experts that provide a company’s leadership team with guidance on company vision, innovation, risk management, and profitability. Though they provide management with advice, they do not possess the authority to vote on corporate matters.