What is the value of a for-profit advisory board? (See the bottom of this article for information sources.)
A for-profit advisory board is one which exist in companies who focus is on making a profit (i.e. not a charity 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 32% and productivity growth of 6% vs 3%.
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. Board has no voting authority 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 arrangement, their advice may be biased.
The advisory board is focused on specific problems. Given the metrics for the advisory board focus on financial results, the specific problems the advisory board deals with are those which have the greatest impact on long-term business value growth and preservation.
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 impacted 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?
Some of the benefits, according to business leaders (rating on a scale of 1 to 10):
- 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 is the impact of an advisory board, as perceived by companies with advisory boards?
85% believe that the advisory board had a significant impact on success.
Some of the impacts, according to the business leaders (rating on a scale of 1 to 10):
- 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) had no board. 19% had board of directors, 3% had advisory board and board of directors (often the advisory board reported to the board of directors), 3% had only advisory board.
- 11% of companies with more than 100 employees had advisory board.
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.
How do you organize an advisory board?
- The written mandate must have the objectives, terms of reference and time commitment. Based on the objectives (e.g. business development, increase profits etc.) the requirements for individual advisors can be determined. Each advisor commits to reading preparatory documents, actively participating in the meetings and followup. 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. An advisory board supporting the CEO should only permit informal contact between the CEO and advisory board chair. Communications should be two-way so that the advisor can alert the company to important events or contacts. 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, but rather complement the board of directors.
- 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.
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.
To enable discussion with your investors, board and management, download the following one-page slide:
Two key information sources are available for free downloading: