|Management of a business|
An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the Board of Directors. Unlike the Board of Directors, the advisory board does not have authority to vote on corporate matters or bear legal fiduciary responsibilities. Many new or small businesses choose to have advisory boards in order to benefit from the knowledge of others, without the expense or formality of the Board of Directors.
- 1 Function
- 2 Reasons for creating an advisory board
- 3 Creating and operating an advisory board
- 4 Benefits and drawbacks
- 5 Examples of advisory boards
- 6 Startup advisory service
- 7 References
- 8 External links
The function of an advisory board is to offer assistance to enterprises with anything from marketing to managing human resources to influencing the direction of regulators. Advisory boards are composed of accomplished experts offering innovative advice and dynamic perspectives. Meeting quarterly or biannually, boards can provide strategic direction, guide quality improvement, and assess program effectiveness.
Entrepreneurs, especially from startup companies or small business may not want to dilute their control of their business by establishing a board of directors with formal responsibilities and authorities. Thus, an advisory board may be a more suitable solution to entrepreneurs who want access to high-quality advice and network in the industry. Advisory board, as an external group, could also provide non-biased information and advice to entrepreneurs.
- developing an understanding of the business, market and industry trends
- provide “wise counsel” on issues raised by owners/directors or management
- provide unbiased insights and ideas from a third point-of-view (not involved in the operation of the business)
- encourage and support the exploration of new business ideas
- act as a resource for executives
- provide social networking platform for directors and the company
- encourage the development of a governance framework that enable sustainable growth of the company
- monitor business performance
- impose challenges to directors and management that could improve the business
Reasons for creating an advisory board
The main reason to create an advisory board is to seek expertise outside of the company. Advisory board members should provide the company with knowledge, understanding and strategic thinking of the industry or management of the company.
Companies should seek advisory board members whose qualities complement the existing board of directors and not mask gaps in knowledge or skill in the main board. An advisory board strengthens the existing board, but does not interfere with authorities of the existing board. The former editor of The Economist, also an advisory board member, once said, “They (advisory boards) are there to give focus to or sometimes challenge research and intelligence work being done in the company, thus avoiding groupthink and giving direction on big picture issues.”.
Creating and operating an advisory board
There are two key questions to be asked when creating and operating an advisory board. The first question is who is trying to achieve what from an advisory board. The second question is how the business of the board should be conducted. The following issues need to be addressed.
The type of advisory board members should be determined by the nature of what is sought and expected from them by the enterprise. Advisory board members should have distinctive knowledge on different aspects of business such as marketing, product development, sales techniques that are of use to the directors.
A lack of definition in “what is sought from the advisory board” or “what sort of advice is to be sought of” would lead to a disorganized board, which eventually could lead to an advisory board that provide less value per dollar or hour invested than a well-mandated one. Eventually, it could result in a waste of resources and time for the enterprise and the advisory board members.
The advisory board must determine what the focus of the committee is, whether it is a broad focus or a narrow one on a specific product feature. Individuals in an advisory board should share a common goal or similar interests.
For example, Algorithmics Incorporated, a company acquired by IBM in 2011, provides risk software solutions. Employees in Algorithmics specialize in software development, mathematics, financial engineering and risk analytics. Algorithmics expanded the breath of advice beyond its nine-member board of directors and built an advisory board that focused on the benefit of customer and potential customer input on product and market direction. Advisory board members include executives charged with enterprise risk management responsibility, who would compete against each other, but share an interest in providing suitable risk management underpinnings to their business. This common interest help ensure that the advisory board would be committed and pleased to meet with the CEO of Algorithmics.
Size of an advisory board influences the efficiency of delivering ongoing information and effectiveness of organizing board meetings. A large advisory board may result in managerial issues. Therefore, if is recommended an advisory board to begin with the advisory board leader, and grow from a fairly small size to its ultimate number. Group dynamics suggests the maximum size for an advisory board is eight members, which takes into account of the need for enterprise people and other facilitators at meetings. Some advisory board’s mandate may require more significant representation of a specific and large number of constituencies.
Meeting organization and frequency
The functioning of an advisory board is affected significantly by how effectively the group’s activities are organized and directed. A fixed meeting should be held regularly (monthly, annually or other) and advisory board members must be well informed of the purpose and background information of the meeting in order for them to provide valuable advice.
A corollary should be provided to advisory board members, in which it should be of an appropriate length, organized, comprehensible and informative. While it should be concise, it should provide enough details to provide advisory board members a suitable foundation for them advise on the business. Confidentiality of the information discussed in the meeting shall be considered.
A skilled facilitator, administrator or corporate secretary is required to organize schedules of advisory board meetings and meeting materials. The facilitator or chair of the board should be committed and aware of time management for the meeting. An agenda could improve the organization and time management for the meeting.
Term of membership
Advisory board members could be appointed to specific terms i.e. one, two or three years so that it ensures them to actively commit to the company and prevent them to get too comfortable with their positions. Term of membership is also important when it comes to expansion of the board; term of membership ensures that the size of the advisory board remains efficient and manageable.
Advisory board members serve an enterprise for a range of reasons, from personal loyalty to direct compensation. Compensations are important as they give incentives to advisory board members to commit to the enterprise and give quality advice.
For example, the director of Lorus Therapeutics Inc., Reiter, had described the compensations of members serving on the Lorus advisory committee. Some of the compensations include:
- the interests of science; Lorus engages in research and development involving virulent cancers, attracting members who conduct similar research
- prestige, camaraderie and personal networking benefits
- personal favour; friends and close colleagues of Lorus executives are asked to join the committee
- cash or stock paid back for their advisory board services
Benefits and drawbacks
Benefits of an advisory board
The benefits of having an advisory board over director of board may include the following:
- Distance Control
Multinational companies have local companies running their business in a particular foreign jurisdiction for lower costs e.g. tax, price of raw materials, and organizational benefits. However, giving authority to an outside group of directors in the local company may increase risks and instability of the multinational corporation. Since an advisory board can operate in a different location, with different cultural and business norms, in a different language, multinational companies may choose to have an advisory board instead of a localized board of directors in order to avoid loss of control.
- Preparation for Board of Directors
Companies may choose to have an advisory board before they have a board of directors. The development of an effective board of director requires a group of individuals with good chemistry and has the combination of appropriate skills to propel the business. Having an advisory board allows companies assess the commitments and capabilities of each individuals and observe the chemistry between them before appointing them to a board of directors.
- Higher efficiency
A large board of directors may grow to an unmanageable size where organizational complexity and communication breakdown may occur, leading to ineffective and inefficient function of the board. A smaller advisory board, without the complexity of authority involved in board of directors, may work more effectively compared to a board of directors that grows in size as the corporation grows.
- Formal advice
The complexity and speed of enterprises often make it difficult to seek advice on any particular topic. Enterprises may also find building trust in any person or group to provide on-going and meaningful guidance difficult. An advisory board can then provide the degree of consistency, longevity and background knowledge as advisory board members provide reliable advice on particular issues. Advisory board members receive compensation for committing to their positions. This gives incentives to advisory board members to provide quality advice and ensure that a request for assistance is taken formally.
- Less Pressure on Executives
Executives can express partially defined or tentative view to an advisory board since advisory board’s sole purpose is to provide advice. This allows them to “test-drive options” before they face the board of directors which demands definitive and assertive business decisions. The board of directors assesses the CEO and establishes his or her compensation. While an advisory board may induce change in the company for the benefits of the company, a board of directors inducing change in the company could suggest a lack of confidence in the senior management team. This imposes great pressure on senior executives and could become a barrier for senior executives to express their issues and seek advice from the board. Thus, an advisory board could be a ‘safe harbor’ for senior executives to seek advice and test business options.
- Focused Input
An enterprise may need advice on a particular aspect of its business (such as marketing, product direction, customer service or contact network expansion). While board of directors need to take into account of all aspects and go through a series of administrative proceedings e.g. formal approvals, ratification, an advisory board can focus directly on a particular issue and give advice.
Drawbacks of an advisory board
The drawbacks of having an advisory board instead of a board of directors may include the following:
- Less compensation
An advisory board deals with a more narrow range of issues and meet less often than board of directors. There is less commitment for advisory board members compared to directors in the board. This is reflected in the lower compensation advisory board members receive as compared to those in the board of directors. Nevertheless, the compensation for advisory board members depends on various factors, including return of investments, time, organization and cost.
- Fiduciary duty/ liability issues
Board of directors is exposed to a variety of legislated liabilities, fiduciary and other duties. Responsibilities include unpaid wages, unpaid taxes, environmental damage, etc. By subjecting directors to such liabilities and fiduciary, directors are forced to make decisions and establish policies in a way that minimizes risks. Whereas, an advisory board is not subjected to fiduciary duties or liabilities and therefore could influence the enterprise by providing risky advises.
Examples of advisory boards
Science Advisory Board
EPA Science Advisory Board (SAB) is established in 1978. The Congress directed the United States Environmental Protection Agency to establish a science advisory board that provides scientific advice to the EPA Administrator.
Some of the roles of the SAB include:
- review the quality and relevance of the scientific and technical information being used by the EPA or proposed as the basis for Agency regulations;
- review EPA research programs and plans
- provide science advice as requested by the EPA administrator
- advise the agency on broad scientific matters
Medical Advisory Board
An example of a medical advisory board could be the Medical Advisory Board of Howard Hughes Medical Institute, which is composed of distinguished scientists and leaders of biomedical research institutions.
Some of the roles of MAB include:
- Give advice on the long-range strategy of the Institute for achieving its mission to promote biomedical research and science education;
- Proposals for new research programs, investigator competitions, and grants programs;
- The scientific achievements and future potential of current investigators, including the evaluation of whether an investigator's term of appointment should be renewed;
- Other matters concerning scientific programs and performance upon which the president requests advice and recommendations.
Technical Advisory Board
Some roles of the TAB include:
- advising the home secretary on whether the obligations imposed on communications service providers (CSPs) under the terms of Regulation of Investigatory Powers Act (RIPA) are reasonable.
An example of a scientific advisory board could be the Editorial Advisory Board of Cambridge Scholars Publishing.
Some roles of the EAB include:
- advise on commissioning focus of Cambridge Scholars Publishing
- improve on academic publishing
Citizen Advisory Board
An example of citizen advisory board could be the volunteer citizen advisory board of the American local government. The purpose of the advisory board is to engage citizens in the democratic process. The main purpose of the advisory board is to provide judicious advice from a citizen perspective.
Some of the roles of a citizen advisory board include:
- provide assistance to the legislative body when formulating public policy and help transform policy decisions into action
- address issues of interest or conduct background work on technical or politically sensitive issues
- serve as a way to build public consensus on controversial issues before elected officials make a decision
- give the community a forum for discussion in greater depth than is possible before a legislative body
Energy Advisory Board
Some of the roles of SEAB include:
- provide advice and recommendations to the Secretary of Energy on basic and applied research and development activities
- provide advice on economic and national security policy
- provide advice on operations of the Department of Energy
Startup advisory service
Business startups often need advisory service to guide them in setting up the business. Advisory service is different from advisory board, where advisory service only offers short-term guidance by payment, whereas advisory board is a body that offers long-term guidance and receives a variety of compensations.
Startup Advisory Service may provide guidance in the following fields:
There are many ways to set up a business. Advantages and disadvantages and consequences such as liability of proprietors, taxation and capital gains, have to be analyzed.
- Business plan design and development
Business plan is important not only for planning purposes, but also for obtaining banking funding or other credit arrangements. Startup advisory service could provide guidance to startup businesses on designing and developing a comprehensive business plan.
- Financial forecasting
Financial forecasting is important as it helps financial executives to prepare a budget, plan a strategy or set business goals. Financial forecasting helps startups to plan a suitable business model and guide business decisions at every level of the organization.
- Marketing strategy
Marketing strategy is important because it directly influences sales, reputation, branding and customer loyalty of a business. Startup advisors have the experience and network to develop a suitable marketing strategy for business.
- Banking and finance
A business may require loans, credit cards, bank accounts, merchant facilities, insurance, a superannuation fund, etc. While startup business may not have the knowledge to set up banking and finance, advisory services could provide them guidance in such area.
- Advisory board recruiting and/or participation
Since startup advisory services a short-term guidance, a business may want to access long-term guidance and advice for specific business ideas, product development, and social network in the business. Some startup advisory services help startups to recruit advisory board members using their existing network with professionals.
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