Continuing our exploration for a roadworthy communication vehicle, we will further examine the role of an Advisory Board as the closest thing to a silver bullet for ensuring a successful business transition.
The image above is a classic representation of two completely different shape interpretations. Each is entirely valid, but only one can be kept in perspective at any given moment. When presented with this image for the first time, most people clearly see one of the two shapes but have to be prompted to find the other.
Purportedly devised by Danish psychologist Edgar Rubin in 1915, this simple illusion can be perceived as both a vase and as two human faces gazing at one another. Focusing on the white shape identifies the vase with its broad base, narrow stem and wide mouth. Training the eye on the black portion of the image will reveal the identical profiles of two faces.
Psychologists tell us that the brain cannot process two perceptual experiences at the same time, but rather shifts from one focus to the other. Yet the ability to view two perspectives at once is essential for creating a common interest between exiting and incoming generations in your privately-owned business. An Advisory Board can help you see those differing perspectives.
Strategic or operational?
An Advisory Board is a non-legal structure that serves to generate ideas, provide an additional perspective, and establish some level of accountability in the de facto control of a privately-owned business. Ultimately it helps create alignment between your goal to preserve and protect your equity and your focus on ensuring the business continues to be competitive and profitable.
Theoretically, an Advisory Board will focus on either the ownership area or the management of the operating business. In practice, many small to medium-sized businesses set up one board that switches focus between these two key components.
The role of an Ownership Advisory Board is to protect wealth and set the stage for continued growth. In other words, it looks after the goose that lays the golden eggs! We call this a Strategic Board. Its mission is to meet shareholder objectives and ensure a return on investment. This is accomplished by developing a viable long-term strategic direction for the business and a fair and equitable entrance and exit process for individual shareholders. The Ownership Advisory Board could act as a catalyst to initiate:
- A long-term strategic plan that outlines a clear and unified direction
- Development of appropriate ownership principles, such as the criteria for buying and selling shares, as a foundation for an effective shareholder agreement
- Wealth and/or estate plans that protect each shareholder's investment
- Suitable shareholder compensation linked to the current profitability
- A contingency plan that adequately protects shareholder assets from unforeseen events
- Discussion around the criteria for ongoing reinvestment in the business
- Enhanced communication and learning among current and future shareholders
- Preparation of next generation owners for their role as Directors
On the other hand, a Management Advisory Board focuses on ensuring a profitable and competitive business. It is an Operational Board charged with producing more golden eggs! Its mission is to ensure the business meets its strategic objectives and is never dependent upon one specific person for its success. Key functions of a Management Advisory Board might include providing input into:
- The roadmap to deliver the vision (a diversified business plan)
- The process for implementation of this roadmap to take the business to a higher level
- Best practices for managing the business assets and business performance
- Defining the ARAs (authority, responsibility, accountability) for members of the management team
- Linking compensation to ARAs
- Developing a comprehensive mentoring process for the next generation management team members
- Developing and implementing a management transition plan
Generally, ownership or strategic advisory boards meet once a quarter, although they can opt to meet more frequently in the start-up stage. Management or operational boards typically meet monthly or bi-monthly at minimum.
Additional meetings can certainly be scheduled as required. We recommend meeting off-site whenever possible so as to avoid disruptions stemming from the day-to-day issues that will undoubtedly arise.
Finding the right people
We recommend your ownership advisory board include at least one independent with first-hand knowledge of a family operation and the types of issues your industry will face during the next five years. Highly-respected, recently retired CEOs are a good choice.
Representation from the current shareholder group should comprise of those owners who are involved in the day-to-day operation and some who are not. Some businesses also choose to recruit a member of their team of trusted advisors while others prefer to keep this relationship as a separate professional engagement.
The make-up of a management advisory board is slightly different. Typically the mainstay of such a board is the CEO and other key members of the management team. Shareholders who are not involved in the business may be included if they have a specific competency or interest that is relevant to the operation. The required outside perspective can be gained from the inclusion of a respected individual from the same or similar industry.
It is important to ensure both insiders and outsiders are qualified or trained to be effective board members. When inviting individuals to sit on your advisory board, first consider what attributes you require and then send an “invitation to serve” that ensures the recipient has clarity around:
- Your advisory board's mandate and objectives
- Their authority, responsibility and accountability as a member of the advisory board which may include directives around:
- Being a steward (building long-term value)
- Supporting the business and ownership philosophy
- Promoting policies, rules, agreements
- Maintaining discipline
- Offering perspective and constructive feedback
- Developing successors
- Ensuring clear goals and mission
- Monitoring business performance
- The benefits of serving and the compensation for their commitment
For assistance in setting up an Advisory Board that can give you this much-needed additional perspective, contact your BDO advisor or a member of The BDO SuccessCare team at 1 800 598 6400.