Good Advice Pays Off

Friday, September 1, 2006 - 15:28

Advisory boards can provide much needed management firepower for growing small businesses. Darren Baguley investigates this growing trend.

Three years after Sally Laughlin struck out on her own and set up boutique executive search firm Laughlin Executives she realised that to achieve her goal of expanding into overseas markets she needed to access additional expertise. Added to this was the feeling that after running the show on her own for three years, she needed some people to work as sounding boards and challenge some of the assumptions she was making about the business. As Laughlin Executives was only a small consultancy, appointing additional people to the management team wasn't an option, nor was appointing a formal board of directors. Instead, Laughlin opted for a solution that has been common for some time now in the corporate and non-profit world, and is rapidly filtering down to many smaller companies - she appointed an advisory board.

Advisory boards consist of non-executive directors with lesser powers and responsibilities compared to the director of a public company. In the case of smaller companies like Laughlin the advisory board cannot dismiss the CEO - the CEO is usually the owner of the company - and it is not required to sign off on the company accounts. Advisory boards are selected by the CEO, and the members are often appointed to provide specific technical expertise. In Australian companies members are generally not remunerated for their time although they are reimbursed for travel and accommodation expenses.

"As the CEO of a smaller firm I find I need to be challenged and stimulated by a level of person my company could not afford on a permanent basis," says Laughlin. "In addition to filling in the blanks, an advisory board can act as devil's advocate, pointing out pitfalls and providing a reality check for ideas."

Smaller companies appointing advisory boards is becoming a noticeable trend, according to Ann-Maree Moodie, Managing Director of Boardroom Consulting Group and author of The Twenty-First Century Board: Selection, Performance and Succession. "[From a management perspective] the advantages of having an advisory board are similar to having a board of directors, but an advisory board can be more attractive in some ways. Advisory board members generally don't get remunerated, especially not in the way directors of listed public companies are. They may, however, be offered shares later, which is a good way of giving that recognition for the work they've done. For the executive team, having an advisory board is like having a sounding board, if it's comprised correctly."

When selecting an advisory board, like any board, it's essential that the CEO aligns the skills of the advisory board with that of the company. For example, if the company is working towards an Initial Public Offering (IPO) it needs to have an advisory board comprising people who understand the company, the industry it's in, as well as that particular business cycle and what's required in that situation at that particular point in time.

"When CEOs are selecting an advisory board they need to choose people who can give them the right advice, who have the experience and knowledge to be a member of that board," says Moodie. This view is echoed by Anthony Mitchell, Founding Director of strategic advisory firm Bendelta. "The advantage for small organisations choosing to have an advisory board is that the people owning and running the company can get information and assistance without loss of control. A formal board tends to be responsible for governance of the organisation and owners of smaller organisations don't want any outside assistance with governance. It's their company and they want to control it, they don't want outsiders potentially getting their way on key votes if they are able to get the numbers. But they do want any combination of guidance, advice and help with networking or business development."

The timing

At what point does it become worthwhile for a company to appoint an advisory board? In the case of a formal board of directors it's obvious. Outside capital comes into the firm and it needs to be represented. With an advisory board it's less clear-cut, but often an executive team will see a need for an advisory board when an organisation is doing something it hasn't done before, or is getting to an area that it doesn't have any experience or expertise in. An IPO is a classic example of a situation when external advisers may be required, while other circumstances could be geographic expansion, moving into a new line of business, new technologies or if the business is rapidly expanding. As a result, advisory boards tend to be more focused.

"When a public company is putting together a traditional board of directors it is looking for diversity; people with knowledge in a broad spread of areas like law, accounting etc," says Mitchell. "When an organisation is putting together an advisory board it might be more focused. For example, if a company is looking to expand by franchising, it would appoint someone to the advisory board who had done that successfully elsewhere."

When it comes to actually selecting an advisory board CEOs will often first look to people they know personally. However, it is becoming more common to use more traditional methods such as executive search firms. Either way it is vital to begin with the end in mind. "When setting up an advisory board, a CEO needs to also look at the possibility that those people will become fully-fledged board members [at the appropriate time in the company's life cycle] and canvas their interest in that," says Moodie.

"But by the same token a CEO also needs to consider whether they really need an advisory board to help the company at this stage, but may require a board with completely different people when it develops further. Therefore, CEOs need to begin like they wish to continue."

Once an advisory board has been constituted it should be looked upon and respected just like any other fully-fledged board, even if an organisation has no intention of making this a permanent arrangement. It should have proper structures and processes including good meeting practices, like having an agenda and making sure the advisory board members have the board papers well before the meeting. The performance of members also needs to be measured in some way.

"It's probably a bit much to ask advisory board members to have performance evaluations," says Moodie. "But the CEO may have an annual review of how the advisory board is operating. The CEO should ask if the members offer the executive team any advice as to how they can help the advisory board help them in a better way. Some advisory boards may take that suggestion to the nth degree and operate like a normal board; but if a CEO is going to do that, the board may not necessarily want to have all those sorts of issues in addition to just being an advisory board member. Ultimately it is a matter of communicating with the board members to find out what works best."

Recent changes in legislation and increased scrutiny of company boards in the interests of governance has in many ways increased the attractiveness of serving on an advisory board. "[Under the new governance regime instituted post-HIH, OneTel, NAB, etc] there are directors of public companies saying they don't want the workload, the workload has become too onerous or the risk is too great," says Moodie. "Private companies offer a more attractive alternative to working in that kind of environment. It's not that private companies don't have the same sort of expectations or are not as well governed as listed companies; it's just that the spotlight is not on the directors on the same scale as it is in publicly listed companies." Even though private companies are not required to follow the ASX's Principles of Good Corporate Governance and Best Practice Recommendations Moodie has found that many still regard the guidelines to be a good framework even if they're not required to follow them.

While advisory boards aren't subject to the same governance standards as public company directors, Australian Institute of Company Directors (AICD) Chief Executive Officer Ralph Evans says it would be foolish to consider serving on an advisory board as a "director lite" sort of position. "The business of being a director of a company entails quite heavy responsibilities and you're either doing it or you're not doing it. I don't think there's such a thing as half a director. People may still be liable to be sued by the company for decisions made as an advisory board member and there have been legal cases where the courts have deemed people who didn't consider themselves directors to be directors."

Evans adds that whether serving as an advisory board member or the director of a public company, it is important that a person has sufficient time to discharge those responsibilities. "A good director will take their duties very seriously and won't take on more than they can handle because they'd be making a serious mistake, and they know that. If someone took on more than they could do properly, either because it was remunerated or it was prestigious, it is potentially a bad mistake for both the company and themselves. The ASX's principles say that you should have enough time to do the job properly."

Why busy people serve on advisory boards

In contrast to the situation in other countries such as the United Kingdom and the United States , Australian advisory board members tend not to be remunerated. Some companies do offer members equity over time, and while this represents a good opportunity to get in on the ground floor with a company that's on the way up, most people who serve on such boards are not in it for the money. Some see it as a tick on the résumé and a stepping stone to a formal board position, while people serving on the boards of more established companies often enjoy the atmosphere of a start-up company and feel that they can make more of a difference. Many advisory board members also see it as a way of giving back to the business community. For Laughlin's executive advisory board member Jeff Johnson it was a bit of both. "I get a lot of personal satisfaction, get turned on by the dynamic of actively accepting the challenge of involvement in another business opportunity," says Johnson. "But also with the Laughlin board I was very impressed with the CEO Sally Laughlin. Before I moved to Australia I was very involved in the US in issues of workplace diversity, and I'm personally quite passionate about the development of firms that are owned and led by women executives."