ADVISORY BOARD

Roles & Responsibility

An effective advisory board, properly composed and structured, can provide non-binding but informed guidance and serve as a tremendously in the quest for superior corporate governance. This author, a lawyer with significant experience on board of directors, offers a helpful blueprint for establishing an effective advisory board.

Nobody can build a great business alone, and whether it’s a start up or established industry leaders, having access to high-quality advice can enhance an organization’s odds of success. Entities seeking advice can obtain it from a board of directors, consultants or networks of one sort or another. Increasingly, attention is being given to advisory board. This article discusses the role of these boards, how they should be structured and organized, and their value to an enterprise.

Why has an advisory board?

Enterprises considering setting up an advisory board must answer a key question: “Why we are establishing an advisory board and what do we want out of it?” The enterprise may be seeking assistance with anything from marketing to managing human resources to influencing the direction of regulators. Thinking carefully about an advisory board’s purpose will ensure that it will be structured to maximize its contribution to an organization’s success.

Private company

For many entrepreneurs, the decision to involve outsiders in their business may be a wrenching step. Some simply do not want to dilute their control by establishing a board of directors with formal responsibilities and authority. However, the introduction of an advisory board can help some come to terms with this decision, by enabling an entrepreneur to feel comfortable with the business of providing information to, and accepting advice from, an external group.

There is a particular variation of this issue. Multinational companies may benefit (in organizational, tax or other ways) from having a local company carries on their business in a particular foreign jurisdiction. However, that same multi-national may be reluctant to cede meaningful authority to an outside group of directors of the local company. In such a case, an advisory board can address the realities of operating in a different location, with different cultural and business norms and perhaps in a different language, without any loss of control.

An advisory board can serve as a feeder group for a board of directors. The latter functions well when (among other things) it is comprised of individual whose chemistry is good and who have the skills appropriate to the needs of the business. But the development of an effective board of directors is a long-term project. In the interim, it may be helpful to observe the nature of

Contributions that individual can make, and the extent of their commitment, on an advisory board, before appointing them to a board of directors.

The smaller advisory board can, in certain cases, work more effectively than the larger board of directors. While views differ on the optimal size of a corporate board, and while different sizes are appropriate to different companies at varying stages of their lifecycles, all companies face limitations on board size. There may well be input that is required, or that is required for a defined period, that can be sought from particular individual on an advisory board rather than allowing the board of directors to grow to an unmanageable size.

Formalizing advice

People driving enterprises often find that their jobs are lonely. For some, the issue may be that they have yet to build trust in any person or group to provide ongoing, meaningful guidance. For others, the complexity and speed of their business makes it difficult to reach out for help on any particular topic. In these and similar cases, advisory board provide the degree of consistency,

longevity and background knowledge that can allow advisory board members to know enough and have enough interest that they can advise reliably on particular issues. Having an advisory board position and receiving compensation for the position (or being committed in some other way) help to ensure that a request for assistance will be taken seriously and that thoughtful advice will be provided.

Safe harbors

Advisory board provide safe harbors for executives who may be able to test -drive options before they are forced to be more definitive and assertive before a board of directors, which assesses the CEO and establishes his or her compensation. A CEO may feel more comfortable expressing partially defined or tentative views before a group whose sole purpose is to provide advice. For the same reason, an advisory board may also serve as an instrument of change, both as a sounding board for senior executives, and as a body that can inspire change in cases in which comparable suggestions from the board of directors might suggest a lack of confidence in the senior management team.

Advisory board may also be needed, as a practical matter, in certain deal structures. For instance, investors in limited partnership vehicles may require a voice in business operations, but may not wish to lose the benefits of limited liability by “participating in the management” of the business directly. Advisory boards are used frequently in cases of this sort, to bridge the gap.

Focused input

An enterprise may need advice on a particular aspect of its business (such as marketing, product direction, customer service or contact network expansion). An advisory board is created to

Address that particular issue only, without the need to express an interest in or to pay attention to the other aspects of the business (which a board of directors must also consider). The advisory board can focus directly and solely on the issue(s) for which it has been created, as opposed to engaging in much of the ritual that accompanies board of director’s proceedings (minutes, formal approvals, ratifications, etc.).

Customer/competitor issues

An advisory board can help alleviate customer/competitor issues that may arise for a board of directors. There are sensitivities involved in being completely candid about your business before a board of directors when that board also includes customers. The issue can arise in the context of the customer versus your enterprise, but it can also surface as one that is between customers if they are on the board.

Commitment

Dealing with advisory board may be less time-consuming than dealing with board of directors. The latter will typically meet at least four times a year, often more frequently; board committee meetings require additional time. A typical advisory board will meet only once or twice a year. Advisory board meetings can also be shorter, as the range of issues it deals with may be narrower than the range before the board of directors.

The issue of advisory board compensation is addressed further below. Suffice it to say here that this compensation will almost always be substantially lower than those required for corporate directors and than those that would be charged by comparably-skilled consultants, who would not be as consistently committed, in any event.

However, as noted below, if the desired benefit is to be obtained from an advisory board, the enterprise is well served by considering carefully the nature of the investment that must be made in terms of time, organization and cost; the commitment may well need to be substantial.

Fiduciary duty/liability issues

Advisory board can address fiduciary duties and other liability concerns. Directors expose themselves to a variety of legislated liabilities (responsibility for unpaid wages, unpaid taxes, environmental damage, etc.) and to fiduciary and other duties that can lead to civil or regulatory liability. It is most unlikely that an advisory board member could be subject to duties of this sort. While concerns are sometimes expressed about the liabilities of advisory board members, I am unaware of any situation in which that liability has come home to roost. The legislated responsibilities apply to corporate directors only. An advisory board would have to take a much more active role in the management of a business than should ever be contemplated before there could be any realistic risk that non-statutory liability could be attached to advisory board members as such. Accordingly, qualified individuals who may not be prepared to expose

They to director responsibilities might well be encouraged to assist enterprises as advisory board members.

Advisory board operating around limited partnerships represents a distinctive and different case, in which liability (through the loss of limited partners’ limited liability) can be a serious risk. However, the practice of how advisory board function in these cases is well developed, and the risk is therefore obviated there too.

Creating and operating advisory boards

In order to achieve the desired benefits, it is essential to understand who is trying to achieve what from an advisory board. A secondary question is how the business of the board should be conducted. The following issues need to be addressed.

Mandate