What is the value of a for-profit advisory board?

What is the value of a for-profit advisory board?

Advisory boards have a major impact on sales and productivity, comparing the three years after an advisory board vs the three years before an advisory board:  sales growth of 67% vs 23% and productivity growth of 6% vs 3%.1

What is an advisory board?

A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis.  The advisory board has no voting authority the and company has no legal obligation to follow advice.

The board is independent.  Ideally the members have no other business arrangement with the company other than being on the advisory board.  If the members have other financial arrangements, their advice may be biased.

How do you measure value?

There can be two sets of “hard metrics”, especially if it is possible to compare the times before and after the advisory board creation, as well as comparison of any improvements relative to industry benchmarks.

  • What is the impact on sales, earnings, and productivity?
  • What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board actions and business results.  A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

What are the major benefits of an advisory board, as perceived by companies with advisory boards?

85% believe that the advisory board had a significant impact on success.2

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):3

  • Is an essential tool 8.2
  • Allows you to develop a broader vision 8.0
  • Improves strategic business choices 8.0
  • Forces management to look at the company 7.5
  • Challenges the company’s management team 7.5
  • Puts in place a better management structure 7.4
  • Brings rigour in to the company 7.2
  • Reassures shareholders and investors 7.2
  • Avoids costly mistakes 6.7

What are some of the impacts of an advisory board, according to the business leaders (rating on a scale of 1 to 10):4

  • Company vision 7.7
  • Innovation 6.9
  • Risk management 6.8
  • Profitability 6.8
  • Survival 6.6
  • Sales growth 6.6
  • Hiring the best employees 6.2

Who has advisory boards?

  • 75% of SMEs (Small Medium Enterprises)5 have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)6
  • 11% of companies with more than 100 employees have an advisory board.7

How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.8

How do you organize an advisory board?

  • You need to determine the skills and experience required on your advisory board. Look at you 3-5 year business forecast.  What are the opportunities and challenges over that time-horizon?  What is the talent (skills and experience) you need?  What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board.
  • The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up.  The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results.
  • The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
  • It must be clear how the company and advisory board interact. (e.g. meetings only with the CEO or including C-Suite members?  Are all questions (from management and advisors) funneled through the CEO?)  The advisory board may meet monthly, quarterly or as required.
  • The role of the chair is crucial, working with management, the board of directors, and the advisory board members.
  • The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
  • Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors or management, but rather be complementary.
  • Each advisor must also have a degree of passion and interest in the business.
  • The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

 Why don’t companies create advisory boards?

57% believe it is too much work.9

The creation of an advisory board does create more work for management, and more fact-based data collection and analysis.  The question for the CEO, board of directors, and/or owners is whether or not the increase in profitability warrants this additional work.

What does an advisory board cost?

The cost is driven by the value the advisors can create as well as the cash available.

  • A small angel-investor-backed start-up may have a volunteer advisory board meeting on an adhoc basis or even once a year. Advisors will focus on survival issues, CEO coaching, and shifts in strategy.
  • A growing company with 4-6 advisors may provide $15,000/yr compensation for each advisor, with more for the chair – and the time commitment may range from 60 to 125 hours a year. The advisors will focus on the long-term direction and initiatives which have a major impact on value growth and preservation.

Is your CEO or board of directors ready to create a formal advisory board?

The advisory board asks questions and challenges the CEO (or board of directors).  The advisory board does not prepare reports or analysis.

There are three criteria to determine if you are ready for an advisory board.

  • There is a management team who can free up some of the CEO’s time. It can take the CEO 120-150 hours to setup and recruit and advisory board, plus another 60 hours per year for ongoing operations (this assumes 4 one day meetings per year of the advisory board).
  • There is a strategic plan. This plan answers several questions:
    1. Who are the target customers?
    2. What problems or needs do they have?
    3. What is your solution?
    4. Why do the target customers perceive that your solution is a better value than the competition’s solutions?
    5. Who is your team and what are their relevant skills and experience in understanding the customer and to deliver your solution?
    6. How are you going to get customers?
    7. What is your business model for delivering your solution?
  • There is a 3-5 year financial plan, tied to the strategic plan. The financial plan has two components: the cashflow forecast, and the budget.  There is already a process in place to track budgets to actuals.

If you don’t meet the above criteria, you are not ready for an advisory board.,

Next steps

To enable discussion with your investors, board and management, download the following one-page slide:

What is the value of a for-profit advisory board?

To create a formal advisory board, contact the Business Development Corporation of Canada, who have a proven process for creating advisory boards.

Footnotes

Advisory Boards: An untapped resource for businesses  March 2014  Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

1 Page 1

2 Page 10

3 Page 9

4 Page 10

6 Page 6

7 Page 11

8 Page 13

9 Page 12

 

 

5 Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

 

Further Reading

Small company boards: Questions for advisors and directors.  CPA Canada https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/corporate-governance/publications/potential-small-company-directors-advisors-questions

 

Survey: What is the role of advisory boards

https://koorandassociates.org/further-reading/survey-what-is-the-role-of-advisory-boards/