GOVERNANCE AND ADVISORY BOARD FAQS
Got a question about advisory boards? Find the answer below.
In brief, an advisory board is a collective body of leaders that provide non-binding (but highly encouraged) strategic advice and oversight to a business, charity, corporation or other organisation.
This advice typically centres around governance.
What is the difference between an advisory board and a board of directors?
The major difference between an advisory board and a board of directors is that an advisory board does not have legal directorship status nor voting authority on business decisions (unless captured within the company’s constitution). Instead, they operate in a consultatory capacity.
However, contrary to popular belief, advisory board members are likely to be “deemed directors” given their integral involvement in decision-making and are therefore unlikely to be free from liability.
For small businesses in particular, an advisory board rather than a legally appointed board of directors is more commonplace.
What are the similarities between an advisory board and a board of directors?
These two bodies share two fundamental traits:
- They both should be strategic in their focus and function as “shapers of the future” in their niche sector.
- They both have a legal obligation to protect and act in the best interest of the organisation. The essence “Help me grow, keep me safe” is the underbelly of good governance.
An advisory board may eventually evolve into a full board of directors. The key difference is all members will now actually have a visibly legal stake and voting right in the business versus advising from the side-lines.
What is governance?
Governance is about structuring, steering, protecting and monitoring a company to achieve the long-term strategic goals of the business and its key stakeholders. It is, and will continue to be, a cornerstone of business success and longevity.
Related content: A guide to business governance for SMEs
A “beginner’s advisory board” (for a small business, for example) could be to made up of three people: the owner and two independent advisors.
As the business grows in size and complexity, an advisory board may evolve into a formal board of directors.
For most advisory boards, there is not magic number, but on average 4-5 people sit on an advisory board. These key people are typically:
- The entrepreneur (usually the owner) who drives the vision and also the day-to-day operations
- The technician (who understands the industry and the “coal face” and provides input into management execution).
- The strategist (who which may include a skill set in digital transformation).
- The numbers person (though finances are the responsibility of everyone).
As a business grows, additional expertise can be added if/when needed.
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(tm) (outlined below).
Where do I find suitable candidates for my advisory board?
The Institute of Directors network can be a good source of potential candidates, and a vacancy notice board is provided.
High-performing board members ask the questions necessary to understand the full gambit of risks and opportunities and how proposed plans may affect the long term success of the business. Fuelling this curiosity takes board members who can see the strategic intent behind the numbers, tables and graphs.
A board chairperson sets the board’s direction and tone i.e. they are the drivers of board performance. It’s a challenging role which requires someone with the skill and experience to create a collaborative environment, maintain that collective focus, draw out opinions and shape the discussion of prickly issues. They should maintain a strong relationship with the CEO.
They should also know when and how to introduce core strategic issues—get this wrong and it can stifle progress, or worse still, cause irreparable damage to the business. In our experience, high performing boards with a good chair should never have to resort to a vote.
Be sure to do your due diligence to ensure you find the best fit. At a basic level some important questions to ask potential candidates, include:
- What are their qualifications?
- What governance experience do they have? (you don’t want your business to be a training ground).
- What other boards are they on?
- Do they know your market?
- Are they “giants” in your industry?
Should you have an independent on your board?
High performing boards often employ an independent adviser who can bring discipline, experience and objectivity.
Having the external accountant or company lawyer on the board is common; but these professionals should act in an advisory role with a “big picture” or business focus. A pure technician may not be the best choice. Likewise, an experienced member of a large corporate or NZX-listed company may not be the best fit as the mechanics of an SME are significantly different.
It’s important that the board creates a sense of trust and respect among its members and with external parties. It must be shown as a winning team and not a pack of interested individuals feeding their own agenda.
When is it time to add new members 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.
Advisory boards also tend to naturally grow over time as different areas of the business become more strategically relevant. If there is an area of your business that is having an increasing influence on business direction and bottom lines, it may pay to introduce a new member who specialises in that area to best capitalise on it.
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While reviewing compliance matters should be considered the gatekeeper to business risk, performance orientation should be a recurring agenda item.
Discussion around progress towards the rolling three-year plan must always be on the agenda, as should the review of standard reports such accounting matters, monitoring of marketing activities and non-financial performance as indicators.
We suggest you consider Richard Westlake’s FICKS™ model, which will help inject some discipline and help keep your board from veering off track:
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Initial meetings will be untidy and slightly unstructured as the board finds its feet and builds a structure that’s meaningful to your organisation. The focus will shift depending on current “hot issues” such as marketing, liquidity, R&D, personnel matters, strategic growth and so on.
Any proposals around strategic opportunities or a reorganisation of current operational matters should be sent to all board members in advance along with a detailed paper to support these proposals to provide a healthy and informative discussion.
Energy must be put into developing and agreeing on the company vision during these initial meetings, creating a “brand map” and building a five-year goal everyone will buy in to.
Where there are several owners in a business, identifying shareholder/director values, reviewing a commercial remuneration model and setting a valuation methodology for an eventual exit may also be involved.
IT should not be a separate agenda item, because depending on your business, it will fundamentally drive several core business functions e.g. sales, production, customer service and HR. Therefore, the responsibility of overseeing technology should not lie with your IT function alone. Something you should consider as a board member, and encourage as a chairman, is challenging the level of understanding in these areas.
Some boards are often weighed down by a large amount of unnecessary information that provides little insight and serves only to dilute a board’s strategic focus. This is usually because a manager is either worried about leaving out relevant information, or because they have a need to reinforce their activity i.e. “the bigger my report, the busier I am”.
Boards need to get into the habit of regularly reviewing the information they are presented with (especially if there is an independent to consider) and accept that they have a role to play in defining the best measures of performance.
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There are two primary areas that an advisory board needs to focus on:
- What do we need to do to achieve our strategic plan?
- What risks do we need to protect ourselves against?
A board can only ever tackle one, or maybe two significant tasks per meeting. The responsibility for determining what these tasks are and introducing them falls to the chair (see above). Take the example of a chair who has to address a business owner’s commitment to the strategic plan which involves growing the business fivefold.
Once the chair is assured of the owner’s commitment only then is it appropriate for them to challenge the company structure which, in its existing form, was holding the business back. The outputs of such realisations can be massive and will include a review of the skill sets necessary to operate a multi-million dollar business.
Simply turning up to the board meeting is not good enough; chairs of high-performing boards spend extra time nutting out and thinking through scenarios, like the one above, ahead of board meetings.
Not all positions will be remunerated, so “paid for” positions could be limited and cost effective.
Given the purpose and role they perform, a director’s fee should be considered an investment, not a cost. The proviso is that any external party joining the board must be passionate about building a better business and making it stronger. They need to add value.
It is human nature not to value what you get for free. Good governance guidelines suggest that you are more likely to take action on advice you pay for, plus this also makes the member more accountable.
Most professionals will charge an hourly rate between $200 and $400. While others (what people in the industry call “serial directors”) prefer a flat annual fee ranging between $25k and $35k.
Contrary to popular belief, because of the advisory nature of the role, advisory boards are legally labelled “deemed directors”and are therefore not free from liability.
Thankfully, it is simple to add an independent member to your existing Directors and Officers Insurance without any additional expense. In fact, most professional advisers will already have this insurance.
Most independents who accept a new board formalise the relationship via a simple one-two page agreement, which typically includes indemnities and insurance, plus:
- Their time commitment, term of engagement and fees.
- Their role and what is expected of them.
- Outside areas of interest and confidentiality.
Boards are important leadership disciplines that are a defining characteristic of today’s market leading organisations, big & small. If you want to get more out of your existing governance framework then contact us today.