Establishing an Advisory Board for Your Company

Many privately held companies do not presently need or desire an independent board of directors. Frequently, these companies are managed and owned by a small group of individuals – or even a single individual – who are wary of ceding authority. However, the CEO of a private company may find that he or she could benefit from an outsider’s perspective, particularly where that outsider has expertise in relevant areas or where the outsider could provide important introductions or opportunities for the company. A company’s founders often have used their technical backgrounds to build a successful company, garnering advice along the way from their network of investors, attorneys and financial professionals. However, as a company grows, they may face management and strategic decisions that are common to public companies, and for which they do not have prior experience and need more support.

Within this context, many companies should consider establishing a board of advisors. In general, a board of advisors can provide the company with non-binding guidance and can provide the senior management of the company with a sounding board when the company is making important strategic decisions. The company’s CEO or other senior managers can select a board of advisors with an array of skills and expertise that the company can use in order to achieve its goals. Because advisory boards do not take an active management role, advisors typically do not owe the company the same fiduciary duties as directors and do not face legal exposure.

An advisory board can take many different forms and can serve many different purposes, including as a precursor to a formal board of directors. An advisory board can help your company transition to a formal board if your company experiences significant growth or is required to form a board in connection with a financing round or other business developments. Often, advisory board members can prepare senior management for the changes that come with establishing a board of directors and can be potential candidates for the board or identify appropriate candidates.

Below are five key items your company should consider when establishing an advisory board:

1. Purposes of the Advisory Board. Carefully consider the purpose and scope of your advisory board before establishing it. Unlike a board of directors which is charged with overseeing all of the company’s affairs, a board of advisors can be created specifically in response to a specific issue or set of issues, such as marketing or product development. Consider what the most important decisions are that your company will face (what keeps you up at night) and what advice would help you make those decisions. Focusing the advisors on clearly-defined items can enable them to avoid becoming mired in governance and administrative issues that directors face. By focusing on the issues to be addressed by the advisory board, a company can then select its members accordingly. One further issue for the company to consider: who in the company will be advised by the advisory board? Typically, the CEO will be the main advisee; however, a company may want advice flowing to another senior executive (e.g., the chief marketing officer).
2. Composition. When establishing an advisory board, a company should consider (1) bringing on well-known and well-respected persons with extensive contacts that can bring business and open doors for the company, and (2) having a diverse group of advisors to maximize areas of expertise and networks. One idea a company could consider is to begin by appointing the “leader” of the advisory board, and working with that person to build the rest of the board. Although good chemistry among the advisors (and between the company and its advisors) can be crucial to the advisory board’s cohesiveness and effectiveness, companies should avoid merely appointing “friends” who will be less likely to provide candid, unique guidance. The company should have each advisor sign written confidentiality agreements which both serve a legal purpose and reminds the advisors of the responsibility they have when dealing with sensitive information.
3. Compensation. Advisors can expect to receive less compensation than members of boards of directors. However, a company should strive to pay its advisors fairly, which typically will include annual retainers, meeting fees, and perhaps equity and/or equity options. Advisors may be enthusiastic about other benefits such as prestige, networking opportunities, and the ability to work on exciting issues with other well-respected members of the business community.
4. Meetings, Agenda. Advisory boards typically meet once or twice per year and consume less of the company’s time than would a board of directors, although some advisory boards meet (in person or by telephone) monthly or even more frequently when working on certain issues. It is crucial that the chairman of the advisory board (which may or may not be the CEO or other member of senior management) prepare for the meetings by creating an agenda well in advance of the meeting and distributing reading materials to the advisors that are informative, pertinent and reasonably concise. As a result, advisors will be more likely to come to the meeting ready to provide thoughtful guidance. During the meeting, the chairman should attempt to adhere to the agenda, consider time management and arrange for someone to keep meeting minutes. After the meeting, the minutes should be circulated, including an action plan and recommendations on key issues.
5. Relationship Between Management and Advisors. Perhaps the single most critical element to the success of an advisory board is the relationship between the advisors and senior management, particularly the CEO. Because the advisory board does not bind the company, the CEO must endeavor to let the advisors know that their opinions are valued nonetheless. Regardless whether the company implements the guidance offered by the advisory board, the CEO should never abuse or disrespect the good faith actions of an advisor. As in all other areas of business, a good CEO is also a good listener who acknowledges the contributions made by others. Between meetings, the CEO should maintain contact with the advisors, both individually and collectively, which will increase their sense of connectedness and keep them informed and thus more effective. The CEO must show his commitment to the advisors, and seek to make the advisory role both coveted and fulfilling.