For family businesses, it’s common to assign positions of authority to relatives and require employees to report to them. However, common doesn’t always translate to good. Having outside input is recommended for many different reasons. It can help reduce the risk of certain problems such as unaccountability and fraud and promote long-term financial health. Your family business may benefit from independent advisory boards made of primarily of non-family members.
A Consulting Body
An advisory board serves only in a consulting capacity. So, it doesn’t carry the fiduciary responsibilities or legal authority of a formal board of directors. Small business advisory boards generally are less formal and enjoy greater freedom to develop creative solutions and suggest new business opportunities.
Advisory boards can also act as mediators. Board members may provide perspective and potential solutions for family disagreements over:
- Your company’s strategic direction
- Growth and expansion opportunities
- Mergers and acquisitions
- Loans and other financing initiatives
- Compensation and promotion decisions
- Interpersonal conflicts
- Succession plans
Depending on your board’s composition, it may also be qualified to offer opinions on legal, regulatory, and complicated financial issues.
Building The Base
You’ll want a mix of professionals from varying fields, demographics, and backgrounds on your board. One effective way to recruit advisory board members is to network with business, industry, community, academic, and philanthropic organizations. You may also want to involve professional advisors, such as your CPA, banker, insurance agent, estate planner, or legal counsel. These advisors will likely already be familiar with your company’s goals, issues, and operations.
Specify the mix of traits and qualifications — leadership skills, experience, competencies, education, affiliations, and achievements — needed in members to fulfill your board’s purpose. Verify that these individuals are willing to make candid observations and provide constructive advice. They must also maintain confidentiality and exercise discretion regarding sensitive business and family matters.
It may be practical for you or another family member to serve as the advisory board’s chair. But as your business grows in size and complexity and the demands on your time increase, consider delegating this responsibility to a board member.
Nail Down The Details
Other details to work out include the frequency of advisory board meetings. Meeting at least monthly initially will help the group build rapport and become relevant to your business. Once the board is established, quarterly meetings may suffice. However, emergency meetings scheduled on short notice may become necessary at certain points.
Your business should cover advisory board members’ travel costs and pay them for their time. Cash compensation makes sense for family businesses that intend to remain closely held. However, companies planning to go public often issue stock or equity-based compensation (subject to legal and tax considerations).
Impartial Perspectives
If your family business doesn’t already have one, consider creating an independent advisory board to provide impartial perspectives on your company’s pressing challenges and opportunities. Contact us to discuss if an advisory board could support governance and long-term planning for your family business.
