In an increasingly complex and continuously evolving global business environment, the concept of what constitutes ‘good’ corporate governance and effective management has become a difficult and, at times, a tricky proposition for many business managers and governing boards of directors. One of the ways that business owners and company boards of all shapes and sizes have adapted to this issue is through the creation and deployment of advisory boards.
What is an advisory board?
An advisory board – also called advisory councils or advisory committees – is a collection of individuals (usually independent) who provide non-binding strategic advice and support to the owners, shareholders, and directors of an organisation. Individual advisory board members are expected to possess unique skills, knowledge, and expertise capable of complementing those of the formal Board of Directors to govern the organisation more effectively.
Typically, advisory boards do not have the authority to govern an organisation in the same way as a governing board of directors. Members of advisory boards in Australia are not usually ‘directors’ under the law and, therefore, do not owe the same fiduciary and other legal duties that are owed by directors to a company. There is also considerable flexibility in creating advisory boards because there are no restrictions relating to structure, roles, objectives, and member responsibilities.
Hence, advisory boards can be formal or informal, standing (on-going) or ad hoc (one-time) in nature and will invariably differ in the level of involvement evidenced by the regularity and extent of participation in meetings, and the influence attributed to their recommendations.
An Advisory Board Charter should regulate the precise level of involvement and degree of influence exercised by an advisory committee, together with its fundamental roles, objectives, and responsibilities.
Roles and responsibilities of Advisory Boards
The roles and objectives of advisory boards will vary between companies according to the circumstances and needs of individual businesses and the industries and sectors in which they operate.
The principal role of an advisory board is to collectively provide objective advice and guidance, which contributes effectively to the strategic planning of the enterprise, including the consideration of industry and market trends. According to the Australian Institute of Company Directors, other roles and responsibilities of advisory board members, include:
- developing an understanding of the business, market, and industry trends;
- providing “wise counsel” on issues raised by the owners, directors or management;
- providing the directors and managers with insights and ideas which can only come with distance from the day-to-day operations;
- encouraging and supporting the exploration of new business ideas;
- acting as a resource for executives;
- monitoring business performance; and
- challenging the directors and management to consider options for improving the business.
Advisory boards exist to advise, evaluate and play ‘devil’s advocate’ in all areas of their established role and within the scope of their responsibilities. These roles and responsibilities could extend, for example, to specific business issues, technical and complex matters impacting the organisation, overall business performance, one-off projects (such as an imminent take-over threat), or new initiatives brought by management.
Practical Tips – How to create useful advisory boards
1. Determine the objective of your advisory board
Each company will need to determine the roles and responsibilities of its advisory board in a manner designed to best suit its needs and circumstances. Advisory boards can be general in scope or targeted to specific markets, industries, or issues such as the adoption of new technology or expansion of business operations. Similarly, advisory boards can be standing or ad hoc in nature, depending on the underlying objective of its establishment. Further, the goals of an advisory board for a start-up enterprise will be different to those of an established business at an advanced level in the business life cycle. The individual circumstances of the company, therefore, will also be an essential factor in this initial stage of the process.
2. Establish and ratify an Advisory Board Charter
A formalised charter detailing the roles, responsibilities and expectations of the advisory board, and the interaction of stakeholders with it, should be prepared and ultimately ratified by the board of directors. This charter can be bespoke and tailored to suit the individual needs and requirements of the business because there are no formalities concerning the composition or structure of an advisory board.
3. Identify the ‘right’ members
To a large extent, the identification of the most appropriate members of an advisory board will be dependent upon its purpose and the specific skills and expertise sought by the business in responding to its predetermined objectives. As a rule, diversity in the skills, knowledge and experience of members is highly desirable. A high level of problem-solving and analytical skills, the ability to engage in open, honest and effective communication, and preparedness to “roll up their sleeves” to get the job done are all personal attributes that a member must be capable of demonstrating.
4. Communicate expectations
Clearly and unambiguously communicating expectations to members ensures that everybody is on the same page and working towards the same objectives. Some of the issues requiring clarification could include:
- Term of office – will it be for a set period or ad hoc in nature?
- What is the anticipated time commitment required?
- What are individual members expected to contribute?
- How often will meetings be held? Where? For how long?
- How will members be compensated?
Once agreed, these matters should be incorporated in a letter of appointment or advisory board services agreement.
5. Document the terms of appointment
Any agreement with members of an advisory board should among other thingsinclude terms which:
- outline the communicated expectations (see Item 4 above);
- oblige members to disclose conflicts of interest;
- require members to observe confidentiality in respect of company information; and
- compel members to always act in the best interests of the company.
Such agreements should always be in writing.
6. Preparation. Preparation. Preparation.
Preparing for meetings with its advisory board is critical for business’ stakeholders. Careful and detailed preparation will extract the maximum amount of value from the contributions of advisory board members. Failing to prepare correctly can amount to wasted time yielding an underperforming advisory board. Preparation is the key for meetings to be conducted efficiently and effectively.
Here are some key preparatory steps to adopt:
- Ensuring a prepared agenda exists in advance of the meeting with input from participants.
- Allow a reasonable time for members to acquaint themselves with salient issues presented for later discussion by taking steps to compile and distribute relevant information and materials in advance of the meeting.
- Adhere to any time limits imposed – a short, productive meeting is always better than a long-winded affair which lacks structure and is ad hoc in nature.
- Appoint a secretary to prepare minutes of each meeting and maintain a Minute Register.
- Ensure there is an action list developed from each meeting and that items on that list are followed up by the responsible person on time.
- Keep members informed of significant developments and activities between meetings.
7. Encourage and promote candour from members
Frank, open, and honest communication from members of an advisory board should be actively encouraged as a critical part of the company extracting value from the involvement of the board. It is vital for stakeholders not to be offended by this approach. There are tangible benefits which can flow from a genuine and robust discussion of focus items of importance to the company, especially when based on the prior experiences of your advisory board members. After all, it better to hear it warts and all so something can be done about the issues independently identified by advisors, rather than burying an issue in modesty which then continues to be pervasive in the business.
8. Evaluate board and member performance
Advisory board members must deliver value. While the perception of value for individual businesses may be different, every company should evaluate the performance of individual members, and the advisory board collectively, periodically, to assess and determinate whether expectations regarding value have been, and are likely to continue to be, met. Inclusion of performance evaluation requirements in the letter of appointment or advisory board services agreement for individual members, and the Advisory Board Charter for the composite board, is prudent.
9. Be prepared to remove underperforming members
If a member of the advisory board is not performing to expectations or creating the value required, the board of directors should act swiftly to remove them. Advisory board members are not directors. There is, therefore, less formality in effecting the removal of a member. However, care should always be adopted to ensure that any legal rights afforded to a director under a letter of appointment or advisory board services agreement, for example, are not infringed during the process. It is, therefore, a good idea to include appropriate termination provisions in any legal agreement with members.
10. Respect contributions by the Advisory Board
The members of an advisory board do not provide binding advice. Ultimately, the decision of whether to accept the guidance provided by an advisory board remains with the board of directors. Despite this fact, each member of a duly constituted advisory committee has the potential to make significant contributions to this decision-making process. Directors should not miss the opportunity to take advantage of the skill sets and expertise of advisory board members which are complementary to those of the Board of Directors and remain at their disposal; typically, just a phone call away. Before making decisions directors should ask the advisory board a lot of questions, provide the advisory board with all relevant and available information, listen and take the time to understand the advice provided and reflect whether following this advice is in the best interests of the company.
This article was first published on Linkedin on 6 May 2015 and revised on 29 May 2020.
© 2015 -2020. Robert Nicholls. All Rights Reserved.
Featured image: Shtterstock
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