Recently, private non-public companies have established advisory board services instead of or in addition to the board of directors. There are fundamental differences between a board of directors and an advisory board. If you are a public company or planning an IPO, there must be a legally formed board of directors.
The board meets six to eight times a year, considers procedural and protocol issues. Not only do the major shareholders, but also minority shareholders have the right to nominate directors to the board.
Each director has a mandate of at least one year. The board of directors is a form of corporate control over the business: when everyone is sure that the company is moving in the right direction and does not go astray.
Now about the advisory board services. For the owner, this is a form of access to other directors or experts’ experience, with the help of which he can move the business forward. At the same time, the owner does not legally limit himself.
How the advisory board works
It operates in the form of meetings that can last two to three hours or all day. Sessions take place either according to plan or when there is a need for it. Some companies organise them two or three times a year, while some organise six or eight. The owner can formulate the plan in advance or understand it during the conversation. Sometimes the invitees pay attention to gaps in the strategy, organizational structure or business model.
The advisory board is formed according to one single criterion—understanding the owner, who he needs. Usually, they invite entrepreneurs — people with experience in creating their own business, professional managers or experts: HR, sales, finance. The composition may vary depending on the tasks.
Board members provide a fresh outlook on the company’s operations. They can test the proposals of management, for example, regarding the organizational structure or the owners themselves’ ideas – is it worth entering a new market now or until the company is ready for it.
In Australia, Canada and Europe, advisory boards have gained widespread popularity. These are the most common reasons for creating an advisory board in these countries:
- Launching a startup that needs to increase – this requires strong mentoring support.
- Plans to launch a new product or enter new markets.
- Objectives of a private company to go public.
- The company needs global internal technological changes.
- The company has faced external competitive threats.
- There is a need for regular expert support – the creation of a council will cost less than a one-time payment for visiting consultants’ services.
Advisory board members can be paid for, and some startups offer a share in exchange for mentoring. In any case, council members have more than material interests. They need to share their experience, acquire new ones and expand contacts.
A real-life case example:
In 2015, the owner and sole shareholder of the 15-year-old retail business created an advisory board in his company. Motivation is to move to the strategic level of business management by yourself and transfer operational tasks to a hired CEO. The supertask of the new leader was to open up new directions and develop other markets. The advisory board consisted of three people: an HR manager, a sales specialist from a large company and the same owner-entrepreneur.
In two years, the company overcame the general economic downturn, despite the departure of several key customers, it quickly switched to a new business model. The advisory board actively participated in this: at the meetings, new business ideas were tested, anti-crisis plans were adopted, tracked and adjusted, changes in the organizational structure and motivation of top management were discussed.
Advisory board services meetings are not like regular planning meetings or top management meetings. At the meetings, specialists share information, experience, express ideas, criticize management ideas or make specific proposals and recommendations. For management, the involvement of experienced external directors is a powerful incentive to learn from their experience. The owner makes the final choice on all issues, starting from the sum of all opinions.
This is the benefit for business – without fundamentally changing the legal structure and keeping the situation under control, the owner opens up access to external expertise and moves forward with its help.
