Creating an Advisory Board

Creating an Advisory Board

Why should the founder or CEO of a successful company, or maybe even an entrepreneur leading a company that’s just starting out, consider creating an advisory board? Ideally, formal advisors can open a few doors to other influential people in their network; however, this is just one benefit. In an era defined by “interconnectedness” (of seemingly disparate products, services, industries and myriad digital relationships), an advisory board connects you to insight and experience beyond the scope of your own leadership team. Whether your business is a fledgling start-up or an established cash cow, most organizations can profit from having an inner circle of strong advisors to provide a balanced perspective.

The operative word here is “balanced.” The most effective advisory boards include thought-leaders from diverse backgrounds—industry leaders; professional bankers, attorneys, and accountants; venture capitalists; and academic experts. Of course, the breadth of perspectives and the nature of the advisors’ expertise should be aligned with your company’s specific vision and goals.

Once an advisory board has been established, it is important to develop a plan to manage this valuable resource. The founder or CEO can oversee the advisory board, or you can outsource the function to a professional for a fee. Outsourcing has its advantages: it frees up your executives’ invaluable time, and a paid professional will assume the burden of keeping the advisors on task and potentially removing any who underperform.

In our experience of overseeing advisory boards, we find that most companies underestimate the amount of time and energy necessary to maintain it effectively. The board as a whole should have defined goals and objectives, with clear strategies and tactics to get there. Additionally, the individual advisors should be held accountable for personalized goals and objectives.

It is also important to understand that an advisory board does not function like a corporate board of directors in that its members do not have a fiduciary duty or responsibility to the company. Furthermore, advisory boards have no legal governance authority over the company. Think of advisory boards as a group of mentors who share their wisdom and experience in a frank and honest manner, free from the legal and political constraints that bind an official, corporate Board of Directors. In fact, some companies refer to their group of informal advisors as an “advisory council” in order to avoid any confusion.

That said, it is still important to have each advisor enter into an “Advisors Agreement” with the company. This typically covers such things as confidentiality and non-disclosure issues, responsibilities and time commitments and any compensation and reimbursement arrangements, among other things.

Although most advisors won’t be looking for big dollars, you may find them more engaged and motivated if they receive reasonable compensation for each advisory board meeting (perhaps with different rates for in-person vs. remote participation) along with reimbursement for travel, lodging and meals. If you are considering providing key advisors with some sort of equity up-side, be certain, for everyone’s sake, to consult with your attorney and accountant to help navigate potential tax, securities and ERISA pitfalls.

Establishing an advisory board is a proven way to bring fresh, objective thinking to your company. Formalizing the agreement, and then managing that relationship according to defined expectations, sets everyone up for a mutually beneficial and productive affiliation. Those are the connections that really count.

Steven J. Enwright is a Michigan-based attorney who helps companies establish governance, including advisory boards and boards of directors. If you would like to discuss how an advisory board could work for you, please contact him at senwright@lippittokeefe.com.

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