In Public companies, the importance of a high quality and independent Board of Directors is recognized as generally critical to a company’s strategy, as well as highly relevant to investors’ perception of its valuation. In family or closely-held companies, where such Board appointment is customarily limited to the active owner/management group, the importance of independent perspective relating to strategic direction and complex business matters is often overlooked. The fact, however, is that for small companies this perspective is even more critical.
Our consulting experience has shown that entrepreneurs who are most effective at running their companies for optimal profitability with minimal risk often utilize a team of independent experts, typically called the Advisory Board, to periodically focus and coordinate strategy on high-level issues — as distinct from the operational issues with which management routinely deals.
Advisors usually come from professional arenas (consulting accountants, investment advisors, attorneys –sometimes different than the Company’s regular service professionals), from the general industry (often trusted customers or suppliers, sometimes non-direct competitors), or from personal/business contacts/friendships. The most relevant criteria for selecting an Advisor are always: (a) respect for his/her business acumen, both general and industry-specific, (b) absolute reliability for integrity to protect business confidences, and (c) capacity for honest and effective communication.
The range of issues with which an Advisory Board may deal is broad – including business expansion/contraction/ restructure, financing proposals, policy matters, management performance evaluation/compensation/ succession, financial performance/metrics/budgets, marketing approaches, risk management, and so forth. The underlying objective is always and simply to provide a process where owner/management
can obtain independent, balanced perspective and feedback to best ensure that alternatives and risks have been considered– all in the context of strategic goals and objectives– and to ensure a high degree of ‘reality check’ before critical business decisions get made and actions get implemented.
Advisors typically provide one-on-one response as called upon by owners/managers, in addition to meeting collectively on a regular basis. Most Advisory Boards meet at least quarterly (often informally over dinner) but more often in periods when substantive business issues are prioritized. Since the Advisor role is a formal business commitment to “be there when needed,” the perception of a company’s management calibre and capacity is often strongly influenced by the quality of its Advisory Board appointments.
While the Advisory Board role is not comparable to a voting Director position, where fiduciary capacity includes direct responsibility and certain liability for company actions, the role does require commitment to ongoing analysis of company and industry data (including impact of ever accelerating technology change) in addition to conferences, meetings and sometimes written memorandums.
Accordingly, attracting qualified Advisors willing to take on such responsibilities also requires a commensurate compensation program. Advisory Board members for family or closely-held companies are typically compensated by annual or quarterly retainer, paid meeting fees, and/or incentive compensation related to achievement of specified company objectives (e.g. levels of volume or profitability, effectuation of certain deals, recruitments, financing, etc.). When the company’s strategy involves procuring equity financing, ultimate acquisition or public offering, stock options or warrants are often utilized. In some cases, business “perks” are also provided.