Excerpted from C.O.S.E. publication by PETER D. BROSSE, ESQ., CONWAY,
MARKEN, WYNER, KURANT & KERN CO., LPA
Business owners who operate closely-held (non-publicly traded) businesses find themselves from time to time in need of new ideas, a sounding board, or a mentor to assist them in issues affecting their business. However, since it is common for a closely-held business to be run by family members or a limited number of individuals who generally also own the business, the resource of knowledge and ideas are limited to those few people. Therefore, resources can be limited and ideas can become stale. It can become frustrating and lonely leading a closely-held business. There is a solution. A board of advisors. This article will discuss the use, establishment and operations of a board of advisors.
What is a Board of Advisors?
A board of advisors is a group of people having various areas of expertise, who generally have no economic stake in the business and are appointed by either the governing board or leadership of a business to advise the business’ leadership on specific issues. There is no law requiring the appointment of an advisory board. A board of advisors is simply a tool used by a business’ leadership to provide input on issues faced by the business that require certain expertise or experience which the leadership may not have.
Why Not Hire Multiple Consultants?
Consultants, like a board of advisors, make recommendations to the business’ leadership. However, consultants are typically hired on a project basis. Conversely, a board of advisors is comprised of individuals who have made a long-term commitment to the future of the business and, therefore, develop an intimate knowledge of the business and its leadership. This longterm involvement with the business permits the advisors to have knowledge of certain facts, which a consultant may not be cognizant of and which may be important variables necessary to more fully assist a business’ leadership when problem solving or planning.
How Does a Board of Advisors Differ from Other “Boards”?
State statutes require that all corporations have a board of directors. Under Ohio law, for example, a board of directors must consist of not less than three (3) directors. However, if there are only one (1) or two (2) shareholders, then the board of directors may be comprised of directors numbering one (1) or two (2) respectively. The requisite number of directors may differ from state to state. The board of directors are elected by the shareholders or owners of the corporation. The directors make decisions regarding the day-to-day business of the corporation to which the corporation is then bound to implement through its officers. Of course, today there are other entities of choice, including limited liability companies and partnerships. Limited liability companies are typically managed by either a board of managers appointed by the owners of the company or by the members (i.e. owners) of the company. Likewise, partnerships are managed by the general partners. In all entities the governing board or the owners themselves make decisions which legally bind the entity and must be implemented by the leadership of the business. There are several significant differences between a board of advisors and the governing board of a business. First, the governing board is by statute required to be elected or appointed by the owners of the business. The board of directors as stated above, are elected by the shareholders, the owners of the corporation. The board of managers are appointed by the members or owners of a limited liability company. Also, in a closely-held business it is common for the owners to be on the governing board. However, a board of advisors is typically appointed by the business’ leadership and is not generally comprised of owners of the business.
What’s more, appointment of an advisory board is voluntary and are not statutorily required. Moreover, unless specifically stated, there is no specific term for an advisor to serve. Conversely, a director must be re-elected after serving a specified period of time. Unlike the decisions of a governing board, decisions of a board of advisors are simply recommendations, and are not binding on the business. The advisory board’s recommendations, of course, may be adopted by the governing board of the entity. Only at that time are the recommendations binding on the entity. However, such decisions would be the decisions of the governing board and not of the board of advisors. Additionally, the governing board typically has a fiduciary duty and liability to the owners of the business and sometimes to third parties. This is not true of an advisory board since it acts only in an advisory capacity and it’s recommendations are not binding on the business. This fiduciary duty and liability associated with serving on a business’ governing board is probably the most common reason why it is difficult for closely-held businesses to attract individuals who do not have a stake in the business to serve on the business’ governing board. Additionally, since an advisory board is composed of individuals who do not own or manage the business, it permits objective and independent thought and the added benefit of limiting conflict among the leadership of the business. This is especially true in family businesses and in the common situation where the owners are also the decision makers. A governing board comprised of individuals with a personal stake in the business may cloud their ability to see beyond the four walls of the business. A board of advisors comprised of independent individuals who do not have a stake in the business may more clearly see the issues at hand and may more freely express their views.
Who Should Comprise an Advisory Board?
Advisory boards should be comprised of outsiders—individuals who do not have an economic stake in the business and who will be impartial and objective. A primary goal when establishing a board of advisors is to get fresh and objective viewpoints and to encourage a see exchange of ideas and advice. This is most likely to occur where the person has no economic stake
(i.e., loss of an account or client or investment). However, before appointing a board of advisors, the business leadership should first determine the purpose of the board of advisors and what areas it requires mentoring or decision making assistance. For example, some boards of advisors discuss and advise on issues such as compensation, employee matters, management issues, acquisitions, and divestitures. Other advisory boards may deal specifically with certain areas of the business such as marketing, strategic planning, or management. The expertise of the board of advisors may include legal and accounting, financing, and marketing. It is not unusual for the business’ attorney and accountant to participate on the board of advisors.
A board of advisors may be more effective when other business owners from non-competing similar businesses participate on the advisory board. For example, if the business owner distributes a consumer product to big box retailers, the inclusion of a person from a business which also distributes non-competing consumer products to similar big box retailers may be advantageous.
When organizing a board of advisors, it is important to keep in mind that the board should not be so large as to be unmanageable. Initially, perhaps the business may only include a small number of advisors. As the business evolves, additional expertise and views may be added by increasing the number of advisors or replacing members of the board.
What Business Will Benefit from an Advisory Board?
Both startup and mature businesses could equally benefit from a board of advisors. Why? Generally, the same issues and problems that exist in a startup also exist for a mature company. For example, it is common for a startup company to have cashflow shortages, principally from insufficient capital. Mature companies may also suffer from cashflow deficiencies, but rather than resulting from insufficient capital, cashflow difficulties may be caused by fast growth and collections of accounts receivable failing to keep up with the capital needs to fund the growth. The dilemma to be dealt with is still the same. Both startup and mature companies have issues of compensation and hiring employees. Not only may they have in common the issue of how to attract talent, but also how to retain the talent once the employee is hired. Consequently, new and mature business may equally benefit from the implementation of an advisory board.
Conclusion
Advisory boards should be comprised of outsiders—individuals who do not have an economic stake in the business and who will be impartial and objective. A primary goal when establishing a board of advisors is to get fresh and objective viewpoints and to encourage a see exchange of ideas and advice. This is most likely to occur where the person has no economic stake
(i.e., loss of an account or client or investment). However, before appointing a board of advisors, the business leadership should first determine the purpose of the board of advisors and what areas it requires mentoring or decision making assistance. For example, some boards of advisors discuss and advise on issues such as compensation, employee matters, management issues, acquisitions, and divestitures. Other advisory boards may deal specifically with certain areas of the business such as marketing, strategic planning, or management. The expertise of the board of advisors may include legal and accounting, financing, and marketing. It is not unusual for the business’ attorney and accountant to participate on the board of advisors.
A board of advisors may be more effective when other business owners from non-competing similar businesses participate on the advisory board. For example, if the business owner distributes a consumer product to big box retailers, the inclusion of a person from a business which also distributes non-competing consumer products to similar big box retailers may be advantageous.
When organizing a board of advisors, it is important to keep in mind that the board should not be so large as to be unmanageable. Initially, perhaps the business may only include a small number of advisors. As the business evolves, additional expertise and views may be added by increasing the number of advisors or replacing members of the board.
