Role of the advisory board
Companies must be clear on the purpose of the advisory board and what they hope it will achieve. This will help determine the required skills, knowledge and experience needed and assist in the selection of members of the advisory board. A clearly defined purpose will contribute to the success of the advisory board.
Advisory boards are generally created to focus on the big picture – strategic issues and industry and market trends. Their principal roles are to provide objective advice and contribute to strategic planning. Good advisers can give fresh insights and thinking on emerging or unfamiliar issues, respond to ideas from management, play devil’s advocate and supply high quality objective advice to support the main board’s decision-making. Many advisers are selected because of their contacts and their ability to facilitate introductions to potential suppliers, customers etc.
The ultimate aim of having an advisory board is value creation. If the advisory board is not creating value, then reconsider who sits on it or whether having one is the best means of achieving the purpose. An advisory board adds value when there is an appropriate mix of people and there is open, frank and free-flowing discussion.
Legal liabilities to consider
Under the Companies Act 2003, company directors owe a duty of good faith and care to the company and can be liable if they fail to meet these obligations. However technically, Advisory Board Members do not normally owe these legal duties, as they are not company directors.
However, without clear lines of demarcation between the roles of the advisory board members and the board of directors, there may be circumstances where a court thinks that the board of directors relies on the advice of the advisory board without giving it due analysis and consideration, particularly if there is a negative outcome for the owners of the company. This may lead to accusations that the advisory board members are acting as “shadow” or “de facto directors”. A “shadow director” or a “de-facto director” is deemed by the Companies Act 2003 to be a “director” and will be liable for breaches of directors' duties.
Advisory board member remuneration
Approach to remuneration varies. Some organisations may reimburse advisory board members for out of pocket expenses; some may provide a good lunch; others may pay per meeting attended; others may pay a retainer. Some companies such as start-ups may offer options in the company (often referred to as “sweat equity”). At a minimum, expenses to attend meetings should be reimbursed.
Drivers for setting up an advisory board
There are many situations in which an advisory board may prove valuable to a company. For instance:
- Guiding start-up companies in a rapid growth phase;
- Creating a new product line;
- Moving into a new market segment or industry;
- Moving into a new geographic area;
- Making the transition from private to public and perhaps listing on a stock exchange;
- Restructuring and repositioning a company in the market;
- Implementing major new technology within the organisation;
- Staving off a serious competitive threat;
- Analysing a potential takeover target.
In other cases a company may recognise that it would benefit from external knowledge on an ongoing basis but needs to minimise costs. An advisory board may be a better value proposition than employing consultants.
In the end, it’s not one-size fits all here. You should seek to build the right team of advisors around you in order to meet your critical business objectives whether its in the board room, advisory board, management team or external consultants.
Henri Eliot is CEO Board Dynamics, a consultancy which provides strategic advice to directors and boards throughout New Zealand and Australia.