The importance of advisory boards

October 19, 2016

A new business will go a long way with a great idea, some cash, strong passion and plenty of sweat equity. But it will never go the distance without sound judgment and sage advice.

Constructed properly, advisory boards offer valuable knowledge and perspective to entrepreneurs and small management teams at private companies. With the right advisors, they provide a competitive edge, helping small businesses stay focused on their strategy as they innovate, grow and become more productive.

Advisory boards differ from a board of directors, which have a legal responsibility to the shareholders which they serve. They are smaller and more informal, and their members frequently weigh in on operational issues in addition to giving strategic guidance. Some advisory boards do not compensate their members, others may pay with cash or equity. Regardless, advisory board members do not face the legislated responsibilities, fiduciary duties or other liability concerns that their counterparts serving on governance boards do.

The value proposition

Within small businesses, most entrepreneurs and management teams are preoccupied with operations. They direct their attention to keeping the business afloat and retain little bandwidth to consider the bigger strategic picture. An advisory board can help management through difficult operational moments and oversee the fundamental vision of the company. That function is particularly important in today’s economy, where technology and globalization create an accelerated market place.

A board, whether formal or advisory, represents a formal oversight process that can add discipline to a business, forcing management to look objectively at the company, at the appropriateness of its business model and at the state of the market.

The benefits of well-assembled advisory boards are indisputable. A survey by the Business Development Bank of Canada in 2014 found that they improve both sales and productivity. The bank compared two groups of small businesses between 2001 and 2011. Those using an advisory board reported sales growth that was on average 24 percent more than that of the companies without advisory boards. Similarly, productivity—as measured by the ratio of sales to the number of employees—for the first group outpaced that of the second by 18 percent.

Unfortunately, BDC also found that only 6 percent of Canadian entrepreneurs use an advisory board. The figure is particularly low when compared with the 80-percent satisfaction level these boards recorded in the survey Advisory Boards: An Untapped Resource for Businesses, March 2016.

The trade off

A good board will ensure that the company is set on the right strategic course and it will help identify and mitigate risk. Advisory boards are often precursors to a full established board of directors. They provide structure for an early-stage business and show investors that the founder is serious about building the company.

In return for the wisdom and support of an advisory board, founders have to be prepared to share information and operate with a new level of transparency. Board members need to be able to get up to speed on issues quickly, and that requires the founders to adopt a more disciplined style of communication than the casual conversations to which they may be accustomed.

The management team of a small business doesn’t have to accept the advice of an advisory board, however, it should be respected and considered. Management and the board members need to be aligned in their strategic vision. The purpose of the advice is to support the long-term goals of the company, which may involve differing opinions from management.

Construction

Entrepreneurs are by nature usually self-driven and self-reliant. Some may find the idea of sharing intimate details of their company difficult. That is why it is important entrepreneurs choose advisory board members with whom they respect, feel comfortable, but aren’t necessarily old friends. Entrepreneurs should be looking for values aligned with their own, remembering that their business will benefit most from unbiased advisors with valuable expertise.

It is a good idea to build a skills matrix for the board, similar to what a company will build for its own management team. Legal and financial expertise are often important skillsets a small business will need to add, however, industry expertise and knowledge are instrumental in the early stages of a company.

Prospective members may be former entrepreneurs themselves who still thrive on the excitement of creating new businesses, well-established business people looking to leave a legacy, or veteran directors of public companies who want a hands-on role in a fast-paced environment. The members need to have a good understanding of the relevant industry, and by definition the group is unlikely to be as diversified as a board of directors, which deals with a wider swath of issues.

Each new board member should participate in an established onboarding process that is explained during recruitment. The purpose is to ensure members are aligned with the vision and mandate and should include information about the stakeholders, the company’s history, perceived risks, projects and plans as well as a clear outline of management’s expectations of board members.

An advisory board should be large enough to offer a diversity of insights and experience, but small enough that issues can be dealt with quickly.Terms on an advisory board tend to be more flexible than a formal board, lasting on average three years or less. When it is established correctly, an advisory board will add significant value to a business, and leave the founders in control while also feeling some accountability to the board.


To learn more, please contact your local BDO office or:

Peter Matutat, CPA, CA
Partner, National Technology and Life Sciences Leader
905 946 5470
pmatutat@bdo.ca

Brion Hendry
Partner, CPA, CA
905 946 5419
bhendry@bdo.ca

About BDO

One of the nation’s leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.

About BDO’s Technology & Life Sciences Practice

BDO’s dedicated team of professionals serving the Technology and Life Sciences sectors brings you broad-based experience, in-depth knowledge and business savvy that can be critical to your success. Our professionals propose solutions to your challenges and support every phase of your growth from start-up to listed public company. The BDO T&LS team, comprised of leaders in key markets across Canada, brings together the resources of our global network of over 1,400 offices in more than 150 countries around the world. We are entrepreneurial, we understand your issues, and we are focused on providing you with exceptional client service.

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