Diversity in the Boardroom: The Top Three Reasons Private Companies Should Create Advisory Boards

Leadership

Nov 10

In the current climate of change within the world of business an increasing number of privately held companies are considering the role that an advisory board can play in their organization’s future. While there’s significant evidence that an advisory board can have a powerful impact on a company’s success and longevity, the decision to form one is still sometimes met with hesitation. This is particularly evident in companies that are either family owned and run or that have a history of an insular and tightly knit group of leaders at their helm.

It’s understandable that there might be hesitation to bring “outside voices” into a privately held company, and it’s not uncommon to hear questions such as:

What’s the point of having an advisory board?
What’s the benefit?
Will I lose control of my company?

To answer these questions, and to take things a step further and explore why forming an advisory board is indeed one of the best decisions a private company can make for its future, let’s first understand what an advisory board is, and what it isn’t.

What is an advisory board?

To understand what an advisory board is, it’s worthwhile to compare it to its counterpart, the fiduciary board. Fiduciary boards are required by law in public companies. They’re responsible for protecting shareholders and are accountable to uphold liability and compliance issues. A fiduciary board’s meeting time is, in part, spent dealing with topics like corporate risk exposure, outstanding lawsuits, compliance issues and it’s held liable for maintaining best practices in its governance policies.

An advisory board’s role is to provide assistance to the company, but without the fiduciary responsibilities and liabilities of its counterpart. The focus of an advisory board is typically strategy and business development, and while some of the same issues are addressed on each type of board, like risk and compliance, an advisory board is often considered to be more efficient because of the lack of liability concerns and constraints.

While an advisory board can be considered less formal than a fiduciary one, it also has the benefit of having a greater ability to choose its direction. A good advisory board is also conducted with the same high standards of governance as a fiduciary board, lending it credibility and reputation which is increasingly important with the current focus on character and consumer perception.

To summarize, an advisory board is “freed up” to address things like bringing in new talent, exploring new markets, increasing customer base and succession planning while still addressing important topics like legal issues, but without having to place primary focus on them. Furthermore, an advisory board exists to support the management and growth of the company. Its recommendations are non-binding and it doesn’t hold the power to fire the CEO, but can advise about firing one.

With that understanding, let’s explore the top three reasons a private company should form an advisory board.

#1: To Promote the Company’s Vision and Growth

There are circumstances where the formation of a board is considered a formality, and this can happen for a variety of reasons whether it’s to satisfy investors or creditors or to comply with state law. Given the powerful potential of what a thoughtfully constructed board can do for a private company, however, simply “checking off boxes” and filling seats would be a tragic waste of opportunity.

When you take a close look at all of the moving parts of a successful, sustainable business there’s a myriad of areas to address. Some of these include financial issues and long-term planning, technical issues, marketing, public relations, and legal issues. As well, each company has its own vision, whether it’s succession planning, expansion, rebranding or eventually selling. Particularly in a family owned company, it’s unlikely that there will be people either on staff or within immediate circles who possess deep expertise, experience and insight regarding all of these different moving parts.

A well-constructed advisory board is a group of independent directors, ideally with a wide range of perspective and experience, who can offer strategic advice in their areas of expertise. They can be agents of change, providing guidance and support through their expertise and innovative thinking.

An advisory board can initiate directions that drive the company’s goals and strategy, engender and support new ideas, and monitor results. Each director has the potential to deliver the full breadth and depth of expertise in their area to promote the welfare of the company, and a good advisory board working in conjunction with a receptive management team can literally become a “dream team.”

Because the management of a company is typically so tied up in day-to-day operations and in its inner workings it can potentially miss, or mishandle, bigger picture issues that can affect the business’ bottom line and growth. When seats on boards are filled with those who are in the trenches of a company, or by friends and family, progress can be skewed by interpersonal dynamics and a lack of objective perspective.

Lastly, an advisory board can also extend a company’s network and lend it credibility as an organization. More people on the team, the right people, means more circles of influence that can bring positive impact to a business’ bottom line. Having a well-chosen, diverse board establishes that a company takes its longevity seriously enough to “bring in the experts” to ensure it.

#2: To Promote Accountability

Unlike a fiduciary board which, again, is responsible to shareholders and operates in a “governance environment”, an advisory board exists for the benefit of the company and its executive. Directors can be dismissed, however in a productive dynamic there’s an implied understanding that an executive will value its directors’ input, otherwise there’s no point to their service.

The beauty of this dynamic is that sometimes at its own initiation, the C-suite of an organization has created accountability to driving strategy and growth with the advisory board it coexists with. While there’s no “loss of control”, there is a group of individuals who have committed their experience and expertise and who can serve to keep C-suite executives on course and on track. Viewed in the right context, this can be a very powerful and healthy dynamic for a company.

An advisory board that supports and works in conjunction with the management of a company also has the advantage of understanding the inner workings of the business, while not being intimately involved. This is particularly valuable in the context of the interpersonal dynamics of a family owned, older, or smaller company.

While they exist to promote the company’s goals, unless an advisory board’s compensation is company equity it has no “skin in the game” so to speak, and therefore can advise objectively and without bias. Depending on the structure of the company, a board can also serve in the role of that “someone else” holding C-suite executives accountable, thus sharing the burden with an organization’s owner.

#3: To Improve Financial Performance

In actuality, the first two points support this third one. The bottom line is that a company who is benefiting from broad perspectives, a wide and diverse range of experience, and extended connections is ultimately going to benefit financially.

As well, the company that constructs an advisory board that will engage in a fruitful relationship with its management by offering its perspective and input while holding its C-Suite executives accountable will also no doubt see financial benefits.

That all sounds great, but what do the numbers say?

In a survey conducted by Lodestone Global it was reported that 87% of private company survey participants saw increased revenue after implementing an advisory board, and 81% saw an increase in EBITDA (earnings before interest, tax, depreciation and amortization) as a result.

Remarkably, diverse boards were reported to have an even bigger impact on financial growth. “Over 90% of boards with at least one woman director reported that their companies increased revenues by an average of ~35% since the participant joined the board.” Combined with the fact that companies in the Fortune 500 with the highest number of women directors perform better financially than those with less, there can be no doubt that a well-chosen, diverse board has a direct connection to an organization’s financial performance.

Given these powerful truths about the potential impact an advisory board can have on a private company’s success and longevity it seems that a private company not taking advantage of this opportunity would be missing out. The idea of a loss of control can be reframed to the gaining of a group of individuals whose breadth and depth of expertise have been brought together to drive strategy and support the vision of a company. With the right planning and intention, this decision is a win for everyone.

Are your ready to take your company’s vision to the next level and build your dream team board? Let’s do this.