The value of a board of advisers for family business

An advisory board is a good choice where the family owners or the company need ongoing professional advice and contacts. This is especially the case when their own statutory boards of directors comprise only family members and perhaps a few non-family senior managers from the company. Nonetheless, establishing an advisory board is a major step for any family business. For those family businesses that are considering it, or those that have already done so, it is worthwhile discussing the value an effective board of advisers can bring.

Importantly, an advisory board is not legally constituted and has no decision-making power, as such the director liability concerns involved with a legal board comprising independent, non-executive directors are absent, which can make it easier to recruit skilled members. Advisory board members will, of course, need to be paid, but again, with less risk involved, the remuneration will not generally be as high as that offered a non-executive director with legal duties under the Corporations Act 2001 (Cth).

The most valuable aspect of an advisory board is the independent, expert advice and contacts it can offer. An advisory board can be structured to suit the specific needs of the company. It can both supplement the knowledge and experience of the owners and managers as well as bring new skills and connections to the company. For example, where a business wants to unlock its potential for growth through innovation or new markets in different geographies, it can target candidates who have experience in those areas that the company is deficient. Further, advisory board members need not be from what I would term the ‘usual suspects’ for board candidates such as lawyers, accountants and ex-CEOs. A university professor as an advisory board member, for example, could give access to current research, collaboration and product development opportunities, staff training and expert advice in a very broad range of areas that might otherwise have be closed to a family business.

Strategy is another area where an advisory board can add significant value by challenging current thinking on strategy, which can very easily become fossilised if it is only being developed and implemented by the same individuals year after year. Even worse, as I have witnessed, strategic planning may not be a yearly activity. A lack of strategic foresight such as this can result in missed opportunities, so having a wider perspective on current industry, social and economic trends can only benefit the business in a rapidly changing business environment where the ‘next big thing’ can wipe out or disrupt what was considered a safe business in a very short time, as evidenced by the threat to the taxi industry posed by Uber.

Having an advisory board can also help to ease tensions among family members by giving an unbiased opinion on the direction of the company and important policy decisions. However, this will only be helpful where the advisory board members are not closely associated with a powerful member of the family or family faction. Where this is the case, other family members will be suspicious of any advice from the advisory board, which may further exacerbate the differences between family members with a stake in the company.

The succession process is yet another area where an advisory board can add value. For example, when the time comes for control of the company to pass from one generation to the next, there may be resistance from the current leader(s). The advisory board can again offer unbiased advice to both the current and future leadership of the company on what is best in terms of succession for the company as a whole. Indeed, interaction with an advisory board can be a good training ground for future successors/leaders of the company, since it has none of decision-making powers of the legal board, but in its advisory role it will discuss many of the key issues facing the company and give those family members who work in the company, and can attend its meetings, a different perspective on areas such as strategy and risk.[1]

Although advisory board meetings may be regarded as less formal than corporate board meetings, they should still follow good governance practices, which will be expected by any advisory board members with previous governance experience. For example, meetings should be guided by an agenda, and relevant papers (prepared by the CEO and other relevant managers) should be distributed in advance of the meeting. The advisory board will provide comment on agenda items, deliberate on the papers, and outline their suggestions to the legal board. By doing so, the advisory board is providing a model for the company if it decides at a future time to devolve decision making to a more independent legal board that is selected based on skills and company requirements rather than on family membership.

The foundations of success

An advisory board’s effectiveness will depend on whether:

  • the reasons for establishing the advisory board are clearly articulated to the family owners and the senior management of company;
  • the advisory board knows and understands:
    • the family’s mission, vision, values and goals;
    • the history of the business and its strategy;
    • its role and the expectations placed on it;
  • the advisory board members:
    • have the knowledge, skills and abilities, including the ability to commit their time;
    • have access to information about the business upon which to base their advice, e.g. financial information, key issues facing the legal board, competitor analysis, etc.
    • are genuinely independent, i.e. not paid consultants already working for the business or friends or associates of a family member or members;
  • the family or CEO/senior management respects its advice and/or takes advantage of the knowledge, skills and abilities available to them through the advisory board – if the advice of the advisory board is consistently ignored, then the board should be restructured or abolished.

Conclusion

There are numerous ways in which a board of advisers can assist a family business, including:

  • Supplementing/complementing the current management skill set;
  • Bringing a wider perspective on strategy;
  • Giving the company advice on and access to new opportunities for growth;
  • Connecting the company with individuals or organisations that can benefit the company;
  • Providing advice based on the board members’ areas of expertise to grow the company; and
  • Counselling family members regarding succession.

As noted above, for an advisory board to be a success there must be a clarity of roles. To achieve this, I recommend developing governance policy documents for the advisory board, legal board and family council.[2] This is also essential to protect the advisory board members from being deemed de factor or shadow directors.

Finally, advisory board members are there for one purpose, to provide advice; if the board/family continually choose not to accept that advice, the advisory board members generally do not stay around.

[1] Advisory boards should not operate in isolation, they must be able to discuss issues with members of the management team and other key stakeholders such as a representative of the family council.

[2] For more on establishing an advisory board, see J. Beck, 2013, ‘Advisory boards: the questions you need to ask when establishing one’, www.effectivegovernance.com.au/advisory-boards-the-questions-you-need-to-ask-when-establishing-one/.

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