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Why Private Companies Should Have an Advisory Board

November 1, 2004

By FRANK A. MORSE 

Having served as a director for several companies over the years, I've often thought that a wonderful way to ease into retirement would be to serve on the boards of a handful of companies, attend a few meetings every year, impart a little wisdom, collect enough fees to pay for the veterinary bills and possibly get lucky exercising some lucrative stock options.

Not so fast! Aside from the fact that I don't utter the "R" (Retirement) word impolite company, the idyllic picture painted above no longer exists, if it ever did. Today, directors of publicly held corporations are in the headlights of regulators at every level and are more exposed to shareholder lawsuits than ever - all due to the recent spate of self-dealing, corporate fraud and accounting scandals. As a result, there is nothing part time or laissez faire about being a director of a public company today.

Privately held companies have a different problem. Usually these companies are managed by one or more shareholder or managers who find management to be an increasingly lonesome business in a highly competitive, technology-based, global environment. While most private companies do not have independent boards, certain enlightened chief executive officers find it useful to bring together a diverse and experienced group to truly help with their specific strategic challenges. One way to bring independent direction and advice to privately held companies, without the liability associated with a board of directors, is to create an advisory board. Advisory boards can take many shapes, depending upon the objectives and style of the CEO.

The scenario often goes something like this: The CEO, who has a technical background, has bootstrapped his or her successful business from the ground up, is not trained in modern management methods and now faces the types of challenges that executives of larger companies deal with every day. Until now he has been able to rely on his instincts along with ad-hoc external advice from bankers, lawyers, friends and family, each of whom have a unique bias.

As the business problems and opportunities become large and complex, they have increasingly serious implications for a company and many of these CEOs have looked to broaden their horizons by organizing an independent board of advisers. A board of advisers is a diverse group of professional people who are recruited by the CEO and are organized to assist him in achieving the strategic objectives of the company. Unlike a true board of directors, such a group does not usually have legal standing and except in unusual circumstances, its members cannot be held accountable.

The predominant criterion for a successful advisory board is the commitment of the CEO.He must have strategic vision and leadership skills and be a person who respects others'views. He needs to select the best people from diverse disciplines. The one thing he doesn'tneed is expertise, which should be resident within the company's management team.

Once the board is created, the CEO should be organizing regular meetings, following up on recommendations, communicating frequently between meetings and paying fairly for the board members' time. The existence of an advisory board, much like a board of directors, places a certain discipline on an organization. If it were to meet quarterly, it would tie in with quarterly financial results allowing an analysis of forecast variances.

Other critical topics could include: (1) to acquire or to be acquired, (2) capital acquisition,(3) executive compensation, (4) organization structure, (5) Sarbanes-Oxley-type housecleaning and (6) sales and marketing strategy. In short, if the CEO is waking up at 3a.m., wrestling with the same recurring business problem, it is probably an appropriate subject for his board of advisors.

Ten guidelines for creating an advisory board

1. Do not select your friends, no matter however smart they are or how much they love you.
2. Pay advisers fairly for their time (usually a combination of an annual retainer and meeting fees).
3. Prepare fully for each meeting, create an agenda, distribute information in advance and invite senior executives to participate and present.
4. Create meeting venues and environments that foster dialogue and stimulation.
5. Maintain minutes.
6. Follow up and report on all suggestions, irrespective of whether they are implemented.
7. Stay in touch with your advisers between meetings.
8. Make this a coveted position they can be proud of; make them work for you.
9. Select topics and issues that really matter to moving the company ahead.
10. Create your advisory board for the long haul; stay committed and learn.

Frank Morse is a managing director of Carter Morse & Mathias, an investment banking firm based in Southport, Conn., specializing in raising capital, mergers and acquisitions, and valuations.