WHAT IS A FAMILY BUSINESS ADVISORY BOARD?
Family businesses, especially the founders, seek a group of mentors. They usually want people they already trust - the auditor, the lawyer, their good friends. While the independence of the members of the Advisory Board is important, the very important element is all about trust, however, "not just golfing buddies." Although well-known organisations such as YPO, Entrepreneurs Organisation, and Vistage provide peer mentoring for CEOs, business owners, and executives of small- to mid-size businesses, well-functioning Advisory Boards act as an independent sounding board for strategic considerations for the family business.
A family business Advisory Board is a group of individuals that is intended to provide objective industry and functional expertise to the board of directors and management of the family business. Family businesses often have extensive industry knowledge, which a family Advisory Board can complement with objective, independent insight. The Advisory Board’s role is to offer guidance to the owners of the business, working in conjunction with the board of directors, which in turn provides governance at the company level.
WHAT IS THE PURPOSE OF A FAMILY BUSINESS ADVISORY BOARD?
A family business Advisory Board provides a structure for business owners to reach outside their area of expertise or industry in an effort to broaden their knowledge, experience, and network. It adds value across three dimensions:
KNOWLEDGE AND EXPERTISE
Advisory Board members typically come from diverse backgrounds or industries. The knowledge and experience each board member bring into the conversation adds value, as they provide insight into areas the company may lack. Advisory Board members can help fill gaps in the knowledge and experience of ownership. If owners are strong in sales but weak in operations, a board member with a strong operations background can share that expertise. Family businesses can tap into experience in mergers and acquisitions, human resources, supply chain, international business, and other areas. This expertise may be financially out of reach on a full-time basis.
STRATEGIC IDEA GENERATION
Advisory Board members are not focused on the day-to-day operations of the business, allowing them to provide perspective and creative solutions to the company. They can and should bring a strong strategic perspective to the owners. In most businesses, there are plenty of people already working in the business, and very few working on the business. A good advisory board looks to the future, forcing ownership and management to consider the challenges and opportunities ahead. Further, board members are not legally liable for the company’s operations, which provides the freedom to think outside the box.
DIVERSE BUSINESS EXPERIENCE
An effective Advisory Board can provide a sounding board for family business owners including; How to buy other companies, mergers, financing, launching new products, or entering new markets. Board members can also advise on trickier issues, such as ownership structure and succession, and they should be willing to challenge the CEO. In addition to the experience, expertise, and idea generation gained from an Advisory Board, their members typically provide deep networks that can be leveraged to support additional guidance or business needs. The network effect has the ability to add significant value to the business and its owners, which is especially meaningful when a company is considering entering a new market or launching a new product.
Business owners surrounded by relatives, long-time friends, and employees can easily develop a myopic view of the business and the outside world. A good advisory board puts new points of view in front of ownership and challenges the sacred cows and tribal knowledge that can stymie progress. Advisory Board members are not highly compensated so they have the ability to give ownership the brutal facts.
WHAT ISSUES DOES A FAMILY BUSINESS ADVISORY BOARD ADDRESS?
A family business may elect to establish an Advisory Board for a number of strategic, familial, emotional, and psychological reasons. Advisory boards aren't effective with complex conflictual family issues and are more effective to advise on business matters. The most common issues and reasons that lead companies to set up an Advisory Board include:
Solving complicated financial issues for the business
Providing counsel for difficult decisions when family members disagree
Helping move stubborn projects forward
Gaining experience of outside advisors to supplement the family’s skillset
Generating new ideas with out-of-the-box thinking
Establishing a sounding board to validate emerging business opportunities
Providing an objective voice to help put opportunities into perspective
COMPOSITION OF A FAMILY BUSINESS ADVISORY BOARD
When creating a list of potential board members, the following attributes should be considered:
Sense of duty and commitment
Demonstrated track record
Willingness to speak the brutal truth
Lack of ego
“Advisory Board members should possess a number of critical qualities in order
for everyone involved to benefit. They should bring particular expertise and insights to the business. Integrity and a willingness to be objective and open are also crucial.
The family business is well served if the knowledge, skills, and connections of the people
on the Advisory Board complement those of the family.”
Duty and commitment are important because though board members are not highly compensated, there is a need for full participation in all meetings and outside preparation before the meetings. Lack of ego is essential because the board members need to understand their role in serving on an Advisory Board. Owners won’t always heed their advice. If a board candidate is going to have an ego problem with that, he or she should not be selected.
In addition to the selection of board members, the family should consider the optimal size of the board and meeting frequency. The optimal size may depend upon the size of the family and business with its members meeting at least three to four times a year. Critical to the success of a family Advisory Board is the ability to openly communicate with the business owners; thus, the board should have a strong relationship with the owners.
INEFFECTIVE ADVISORY BOARDS
When the wrong people are on the Advisory Board the result is usually bad chemistry and bad decisions. Often friends and other family members are chosen for personal or political reasons. Because of bad choices, full and open dialog is often obstructed. The poor selection of advisory board participants generally ensures the advice the board will provide is mediocre at best. Having the right people on the Advisory Board coupled with a formal structure is probably a good way to enhance the success of the family business.
Although some family business owners consider starting with selecting their Advisory Board from their so-called “Big Four” advisors; your accountant, banker, insurance agent, and attorney. Successful family business owners and board members however disagree with this approach for a number of reasons. These professional service providers are or should be available to the owners on a daily basis. Their involvement and thought process are typically in the business, not in the business. They may be great at their jobs, but may not be strategic thinkers; they may not want to speak the brutal truth to owners who employ their businesses.