Close

How to set up an advisory board

A tailored, low cost governance programme such as an advisory board may not solve the world’s problems, but it’s certainly a step in the right direction. Aaron Wallace gives some important advisory board advice to business owners who want to get it right.

A tailored, low cost governance programme such as an advisory board may not solve the world’s problems, but it’s certainly a step in the right direction. Aaron Wallace gives some important advisory board advice to business owners who want to get it right.

aaron wallace hayes knight governance

The good news is that in the last six months more SMEs have picked-up on the importance of advisory boards and the benefits this leadership discipline brings. Business owners are asking more questions in an effort to get it right. Sitting on a number of advisory boards, both SME and corporate, I have encountered the questions below and helped a number of businesses work through them. So. let's crack into it...

Where should advisory board members spend their time?

It is easy to generalise and say that the goal of introducing a governance framework is to focus on the strategic vs. the operational, but how do advisory boards balance their function as compliance officers with their function as shapers of the future?

This is a question I'm often asked by clients. To give them some direction I often introduce them to Richard Westlake's FICKS™ model (see below), which injects some discipline and keeps the board from veering off track.

FICKS model

Staying focused is important. Think of the board of a well known chain of DVD stores: where is the value in making sure every building regulation is complied with and every figure compared against last month's results, if they miss the fact that the industry has been reinvented? Human behaviour and expectation has changed. People no longer want to go out of their way to visit the DVD store when they can rent the latest movie or TV show via iTunes, or use the conveniently placed vending machines popping up at major supermarkets. Little to no rent and no staff salaries makes for a profitable model. Suddenly these stores don't have a business. These are the types of issues boards need to be thinking about!

The question of liability regarding advisory boards

Choosing to introduce an advisory board member who fulfils certain absent skill sets or a role missing from the business is important. However, contrary to popular belief, because of the advisory nature of the role they are legally labelled 'deemed directors' and are therefore not free from liability.

But don't panic as it is simple to add them to your existing Directors and Officers Insurance without any additional expense. In fact, most professional advisers will already have this insurance. When I accept a position on a new board the relationship is formalised via a simple one-two page agreement, which typically includes indemnities and insurance, plus:

  • My time commitment, term of engagement and fees.
  • My role and what is expected of me.
  • Outside areas of interest and confidentiality.

What's the magic number? How many should be on your advisory board?

How many people should I have on my advisory board? This question comes up all the time. Given the relative size and complexity of businesses in New Zealand I'm going to put a stake in the ground and say on average
four to six. In my experience any good advisory board needs four key pillars:

  1. The entrepreneur (usually the owner)
  2. The technician (understands the industry and
    the 'coal face')
  3. The marketer, and
  4. The numbers person

As a business grows additional expertise can be plugged in if and when needed. Most businesses will automatically default the accountant to 'the numbers person'. As the 'numbers person' I have to say this is only okay if they have a strong backing of strategic and commercial know-how. Using a 'highly qualified bookkeeper' is like trying to bash a square peg into a round hole; in short you are wasting your time.

Remember to do your due diligence when filling any position externally. As the business grows in size and complexity your advisory board may evolve into a formal board of directors. While this might not exceed six members the key difference is all members will now actually have a stake in the business vs. advising from the sidelines.

Finally, make sure you have a governance and accountability framework in place, as this will help set out the roles of the different members.

Spoiled for choice? Who should be on your advisory board?

Once we have identified the skill sets missing from their advisory board, clients then tend to ask me how they go about finding someone to fill that gap. As a member of the Institute of Directors I typically use this network to help find potential candidates. I then assist clients with the due diligence process to ensure they find the best fit. At a basic level some important questions to ask potential candidates, include:

  • What other boards are they on?
  • What scars and medals do they have? (Experience is key)
  • Are they 'giants' in your industry? Do they know your market?
  • Are they a member of the Institute of Directors?
  • What are their qualifications? (presentations and/or publications)

The bonus of bringing in a strategic professional is that they will bring structure to the meetings and therefore augment the use of models such as FICKS. Pedigree is important and will inevitably be linked to remuneration. Contact me to find out more about the skills matrix and board selection criteria we use with clients.

Does money really talk? How much do you pay advisory board members?

Another popular question: How much do you pay advisory board members? Remember, people do not join advisory boards for money and fame; they generally do it because they want to add value somewhere. If the member is a venture capital investor or shareholder, then the answer is simple: nothing. Their incentive is maximising the value of your company and their investment is incentive enough, but you absolutely need to compensate external members.

It is human nature not to value what you get for free, I've seen it time and again. You are more likely to take action on advice you pay for, plus this also makes the member more accountable. The amount of pay and the mix of cash vs. equity (if there's any equity at all) are highly variable. Most professionals will charge an hourly rate between $200 and $400. Others (what we in the industry call serial directors) prefer a flat annual fee ranging between $25,000 and $35,000.

Take a deep breath. It is a leap of faith for many SMEs but I can promise you that the value gained far outweighs the cost. I've seen this first hand.

When is it time to introduce new blood to your advisory board?

After a period of time a board will become comfortable with one another. This could be a signal that the company has hit optimal performance, but is more likely an early warning sign of complacency. Introducing a new member will keep a board on its toes by injecting fresh debate. Given the speed at which information, communication and technology (ICT) is evolving, complacency is a sure company killer. As our reliance on ICT increases we will see more companies establishing separate governance committees to focus just on ICT.

Good governance produces higher quality decisions that can drive an increase in sales and margins, plus a reduction in costs.

Aaron Wallace is a business improvement director at Hayes Knight