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Advisory Boards

Provided by IFC Corporate Governance


Definition and Role of the Advisory Board

The advisory board is a group of experienced and respected individuals that many family businesses form when their own boards of directors remain only composed of family members and company senior managers. In this case, the board might lack expertise and outside perspective in certain strategic areas such as marketing, finance, human resources management, and international markets. Accordingly, the advisory board is then created to compensate for shortcomings of the board of directors without the family diluting any control over decision-making or being required to share information with outsiders. The advisory board can also add value to the family business through the business connections that its members might have.[1]

The advisory board is often considered a “compromise solution” between a family dominated and a more independent board. Many family businesses recognize the need for an independent board, but are also uncomfortable sharing sensitive company information and decision-making power with a group of outsiders. These family businesses usually opt for the creation of advisory boards as a way of getting outside advice and expertise while keeping control over the company’s real board. Over time and once the family sees the added value of the advisory board, some of its members are often invited to join the company’s board of directors.

Composition of the Advisory Board

The most practical size for an advisory board is from 3 to 7 members. Keeping the size of this board small will help maintain its effectiveness and make it possible for its members to clearly communicate their ideas to the rest of the group. Members of the advisory board are usually experts in the family business’ industry and market, or in other areas such as finance, marketing, and international markets. They also provide expertise and experience when the family business moves into new activities or countries. The advisory board usually meets 3 to 4 times a year, depending on the family business’ size and complexity of operations. The CEO and a few senior managers from the family business can also be part of the advisory board in order to coordinate and orient the meetings’ discussions towards the company’s needs.

In order to ensure the objectivity of the advisory board members, the following individuals should not be part of this board:[2]

- Suppliers or vendors to the company.

- Friends of the owners with no relevant expertise to offer.

-  Existing providers of service to the company (e.g., bankers, lawyers, external auditors, consultants), since their advice is already provided in other forms and their objectivity and independence might be questionable because they are working for and being paid by the company.

- Individuals who have a conflict of interest in being advisors to the company.

- Individuals who are already overcommitted and would not be able to correctly perform their roles as members of the advisory board.

Advantages and Disadvantages of Advisory Boards

The following table summarizes some key advantages and disadvantages of advisory boards:[3]

Advisory Board

 

Advantages

- Its members have no legal responsibilities; this reduces the company’s cost (insurance is not necessary) and makes it easier to recruit members (since membership is not as risky as being part of the company’s board of directors).

 

- Can provide the company with additional skills, technical expertise, and knowledge that are not available at the current management and board levels.

 

- Its advice is usually unbiased.

 

- Its members may offer new contacts that can lead to additional sales or sources of capital.

 

Disadvantages

- The advisory board functions like a group of experts whose advice is not systematically followed by the company. As a consequence, the advisory board might not be taken as seriously as a real board of directors.

 

- The advisory board has no authority to request information from the management, so its recommendations can only be based on what management is willing to share with its members.

 

- Advisory board members have little or no influence on the strategy and performance oversight of the management.

 

- The lack of legal responsibility makes it difficult to hold members of the advisory board accountable for their advice.

 

- Some advisory board members might not take their role seriously and put in the necessary preparation and contribution as they would as real board members.

 



[1] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[2] Richard Narva and Beth Silver, “How to Create Effective Governance in a Family Controlled Enterprise”, NACD Directors Monthly, August 2003.

[3] Adapted from: Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

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