Advisory board

"Advisory group" redirects here. For the commercial, for-profit, public enterprise, see Advisory Board Company.
Wikimedia advisory board meeting, Taipei, 2007

An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the Board of Directors. Unlike the Board of Directors, the advisory board does not have authority to vote on corporate matters or bear legal fiduciary responsibilities. Many new or small businesses choose to have advisory boards in order to benefit from the knowledge of others, without the expense or formality of the Board of Directors.

Function

The function of an advisory board is to offer assistance to enterprises with anything from marketing to managing human resources to influencing the direction of regulators. Advisory boards are composed of accomplished experts offering innovative advice and dynamic perspectives.[1] Meeting quarterly or biannually, boards can provide strategic direction, guide quality improvement, and assess program effectiveness.[2]

Entrepreneurs, especially from startup companies or small business may not want to dilute their control of their business by establishing a board of directors with formal responsibilities and authorities. Thus, an advisory board may be a more suitable solution to entrepreneurs who want access to high-quality advice and network in the industry. Advisory board, as an external group, could also provide non-biased information and advice to entrepreneurs.

Roles and responsibilities of advisory board members[3]

Reasons for creating an advisory board

The main reason to create an advisory board is to seek expertise outside of the company. Advisory board members should provide the company with knowledge, understanding and strategic thinking of the industry or management of the company.

Companies should seek advisory board members whose qualities complement the existing board of directors and not mask gaps in knowledge or skill in the main board. An advisory board strengthens the existing board, but does not interfere with authorities of the existing board. The former editor of The Economist, also an advisory board member, once said, “They (advisory boards) are there to give focus to or sometimes challenge research and intelligence work being done in the company, thus avoiding groupthink and giving direction on big picture issues.”.[4]

Creating and operating an advisory board

There are two key questions to be asked when creating and operating an advisory board. The first question is who is trying to achieve what from an advisory board. The second question is how the business of the board should be conducted. The following issues need to be addressed.

Mandate

The type of advisory board members should be determined by the nature of what is sought and expected from them by the enterprise. Advisory board members should have distinctive knowledge on different aspects of business such as marketing, product development, sales techniques that are of use to the directors.

A lack of definition in “what is sought from the advisory board” or “what sort of advice is to be sought of” would lead to a disorganized board, which eventually could lead to an advisory board that provide less value per dollar or hour invested than a well-mandated one. Eventually, it could result in a waste of resources and time for the enterprise and the advisory board members.

Focus

The advisory board must determine what the focus of the committee is, whether it is a broad focus or a narrow one on a specific product feature. Individuals in an advisory board should share a common goal or similar interests.

For example, Algorithmics Incorporated, a company acquired by IBM in 2011, provides risk software solutions. Employees in Algorithmics specialize in software development, mathematics, financial engineering and risk analytics. Algorithmics expanded the breath of advice beyond its nine-member board of directors and built an advisory board that focused on the benefit of customer and potential customer input on product and market direction. Advisory board members include executives charged with enterprise risk management responsibility, who would compete against each other, but share an interest in providing suitable risk management underpinnings to their business. This common interest help ensure that the advisory board would be committed and pleased to meet with the CEO of Algorithmics.

Size

Size of an advisory board influences the efficiency of delivering ongoing information and effectiveness of organizing board meetings. A large advisory board may result in managerial issues. Therefore, if is recommended an advisory board to begin with the advisory board leader, and grow from a fairly small size to its ultimate number. Group dynamics suggests the maximum size for an advisory board is eight members, which takes into account of the need for enterprise people and other facilitators at meetings. Some advisory board’s mandate may require more significant representation of a specific and large number of constituencies.

Meeting organization and frequency

The functioning of an advisory board is affected significantly by how effectively the group’s activities are organized and directed. A fixed meeting should be held regularly (monthly, annually or other) and advisory board members must be well informed of the purpose and background information of the meeting in order for them to provide valuable advice.

A corollary should be provided to advisory board members, in which it should be of an appropriate length, organized, comprehensible and informative. While it should be concise, it should provide enough details to provide advisory board members a suitable foundation for them to advise on the business. Confidentiality of the information discussed in the meeting shall be considered.

A skilled facilitator, administrator or corporate secretary is required to organize schedules of advisory board meetings and meeting materials. The facilitator or chair of the board should be committed and aware of time management for the meeting. An agenda could improve the organization and time management for the meeting.

Term of membership

Advisory board members could be appointed to specific terms i.e. one, two or three years so that it ensures them to actively commit to the company and prevent them to get too comfortable with their positions. Term of membership is also important when it comes to expansion of the board; term of membership ensures that the size of the advisory board remains efficient and manageable.

Compensation

Advisory board members serve an enterprise for a range of reasons, from personal loyalty to direct compensation. Compensations are important as they give incentives to advisory board members to commit to the enterprise and give quality advice.

For example, the director of Lorus Therapeutics Inc., Reiter,[5] had described the compensations of members serving on the Lorus advisory committee. Some of the compensations include:

Benefits and drawbacks

Benefits of an advisory board

The benefits of having an advisory board over director of board may include the following:

Multinational companies have local companies running their business in a particular foreign jurisdiction for lower costs e.g. tax, price of raw materials, and organizational benefits. However, giving authority to an outside group of directors in the local company may increase risks and instability of the multinational corporation. Since an advisory board can operate in a different location, with different cultural and business norms, in a different language, multinational companies may choose to have an advisory board instead of a localized board of directors in order to avoid loss of control.

Companies may choose to have an advisory board before they have a board of directors. The development of an effective board of director requires a group of individuals with good chemistry and has the combination of appropriate skills to propel the business. Having an advisory board allows companies assess the commitments and capabilities of each individuals and observe the chemistry between them before appointing them to a board of directors.

A large board of directors may grow to an unmanageable size where organizational complexity and communication breakdown may occur, leading to ineffective and inefficient function of the board. A smaller advisory board, without the complexity of authority involved in board of directors, may work more effectively compared to a board of directors that grows in size as the corporation grows.

The complexity and speed of enterprises often make it difficult to seek advice on any particular topic. Enterprises may also find building trust in any person or group to provide on-going and meaningful guidance difficult. An advisory board can then provide the degree of consistency, longevity and background knowledge as advisory board members provide reliable advice on particular issues. Advisory board members receive compensation for committing to their positions. This gives incentives to advisory board members to provide quality advice and ensure that a request for assistance is taken formally.

Executives can express partially defined or tentative view to an advisory board since advisory board’s sole purpose is to provide advice. This allows them to “test-drive options” before they face the board of directors which demands definitive and assertive business decisions. The board of directors assesses the CEO and establishes his or her compensation. While an advisory board may induce change in the company for the benefits of the company, a board of directors inducing change in the company could suggest a lack of confidence in the senior management team. This imposes great pressure on senior executives and could become a barrier for senior executives to express their issues and seek advice from the board. Thus, an advisory board could be a ‘safe harbor’ for senior executives to seek advice and test business options.

An enterprise may need advice on a particular aspect of its business (such as marketing, product direction, customer service or contact network expansion). While board of directors need to take into account of all aspects and go through a series of administrative proceedings e.g. formal approvals, ratification, an advisory board can focus directly on a particular issue and give advice.

Drawbacks of an advisory board

The drawbacks of having an advisory board instead of a board of directors may include the following:

An advisory board deals with a more narrow range of issues and meet less often than board of directors. There is less commitment for advisory board members compared to directors in the board. This is reflected in the lower compensation advisory board members receive as compared to those in the board of directors. Nevertheless, the compensation for advisory board members depends on various factors, including return of investments, time, organization and cost.

Board of directors is exposed to a variety of legislated liabilities, fiduciary and other duties. Responsibilities include unpaid wages, unpaid taxes, environmental damage, etc. By subjecting directors to such liabilities and fiduciary, directors are forced to make decisions and establish policies in a way that minimizes risks. Whereas, an advisory board is not subjected to fiduciary duties or liabilities and therefore could influence the enterprise by providing risky advises.

Examples of advisory boards

Science Advisory Board

United States Environmental Protection Agency established SAB in 1978

An example of a scientific advisory board could be the EPA Science Advisory Board.[6]

EPA Science Advisory Board (SAB) is established in 1978. The Congress directed the United States Environmental Protection Agency to establish a science advisory board that provides scientific advice to the EPA Administrator.

Some of the roles of the SAB include:

Medical Advisory Board

Howard Hughes Medical Institute at Janelia Farm Research Campus

An example of a medical advisory board could be the Medical Advisory Board of Howard Hughes Medical Institute,[7] which is composed of distinguished scientists and leaders of biomedical research institutions.

Some of the roles of MAB include:

Technical Advisory Board

An example of a technical advisory board could be the Technical Advisory Board of the UK government.[8] TAB is an advisory non-departmental public body, sponsored by the Home Office.

Some roles of the TAB include:

Editorial Advisory Board

Cambridge Scholars Publishing, a publishing house that aims to promote knowledge and learning through the production and distribution of valuable academic works.

An example of a scientific advisory board could be the Editorial Advisory Board of Cambridge Scholars Publishing.[9]

Some roles of the EAB include:

Citizen Advisory Board

An example of citizen advisory board could be the volunteer citizen advisory board of the American local government.[10] The purpose of the advisory board is to engage citizens in the democratic process. The main purpose of the advisory board is to provide judicious advice from a citizen perspective.

Some of the roles of a citizen advisory board include:

Energy Advisory Board

Secretary of Energy Ernest Moniz visits the Oak Ridge National Laboratory's Spallation Neutron Source instrument hall.

An example of energy advisory board could be the advisory board of Secretary of Energy.[11]

Some of the roles of SEAB include:

Startup advisory service

Business startups often need advisory service to guide them in setting up the business. Advisory service is different from advisory board, where advisory service only offers short-term guidance by payment, whereas advisory board is a body that offers long-term guidance and receives a variety of compensations.[12]

Startup Advisory Service may provide guidance in the following fields:

There are many ways to set up a business. Advantages and disadvantages and consequences such as liability of proprietors, taxation and capital gains, have to be analyzed.[13]

Business plan is important not only for planning purposes, but also for obtaining banking funding or other credit arrangements. Startup advisory service could provide guidance to startup businesses on designing and developing a comprehensive business plan.[14]

Financial forecasting is important as it helps financial executives to prepare a budget, plan a strategy or set business goals. Financial forecasting helps startups to plan a suitable business model and guide business decisions at every level of the organization.[15]

Marketing strategy is important because it directly influences sales, reputation, branding and customer loyalty of a business. Startup advisors have the experience and network to develop a suitable marketing strategy for business.[16]

A business may require loans, credit cards, bank accounts, merchant facilities, insurance, a superannuation fund, etc. While startup business may not have the knowledge to set up banking and finance, advisory services could provide them guidance in such area.

Since startup advisory services a short-term guidance, a business may want to access long-term guidance and advice for specific business ideas, product development, and social network in the business. Some startup advisory services help startups to recruit advisory board members using their existing network with professionals.

References

  1. ↑ Stautberg S, Green N. INNOVATION FROM THE OUTSIDE-IN: HOW A DESIGN ADVISORY BOARD DRIVES INNOVATION AT P&G [Internet]. 1st ed. 2014 [cited 22 October 2014]. Available from: http://www.partner-com.com/files/Design_Advisory_Board_022607.pdf
  2. ↑ Taylor, E., Marino, D. Rasor-Greenhalgh, S & Hudak, S. (2010). Navigating practice and academic change in collaborative partnership with a community advisory board. Journal of Allied Health, 39(3), 103-110.
  3. ↑ SME Business Owners/Directors The benefits of an advisory board – mentoring for growth [Internet]. 1st ed. Australian Institute of Company Directors; 2009 [cited 25 October 2014]. Available from: http://www.companydirectors.com.au/~/media/Resources/Director%20Resource%20Centre/Directorship%20in%20your%20organistation/00660_SME_FY_The_Benefits_of_an_Advisory%20Board_web.ashx
  4. ↑ Bottomley V, Bingham K, Thorning-Lund S, Slattery R. The Role of Advisory Boards - Who, what, why and how? [Internet]. 1st ed. Odgers Berndtson; 2014 [cited 25 October 2014]. Available from: http://www.odgersberndtson.co.uk/fileadmin/uploads/united-kingdom/Documents/K_I/The_Role_of_Advisory_Boards_-_Who__What__Why_and_How..pdf
  5. ↑ Reiter B. The role and value of an effective advisory board. Ivey Business Journal. 2003;:1--10.
  6. ↑ Yosemite.epa.gov. EPA Science Advisory Board (SAB) | US EPA [Internet]. 2014 [cited 25 October 2014]. Available from: http://yosemite.epa.gov/sab/sabpeople.nsf/WebCommittees/BOARD
  7. ↑ HHMI.org. Medical Advisory Board | Howard Hughes Medical Institute (HHMI) [Internet]. 2014 [cited 25 October 2014]. Available from: http://www.hhmi.org/about/leadership/medical-advisory-board
  8. ↑ Gov.uk. About - Technical Advisory Board - GOV.UK [Internet]. 2013 [cited 25 October 2014]. Available from: https://www.gov.uk/government/organisations/technical-advisory-board/about
  9. ↑ Cambridgescholars.com. Cambridge Scholars Publishing. Editorial Advisory Board [Internet]. 2014 [cited 25 October 2014]. Available from: http://www.cambridgescholars.com/t/AdvisoryBoard
  10. ↑ Merritt L, Doherty J. Local Government Citizen Advisory Boards [Internet]. 1st ed. Municipal Research and Services Center; 2014 [cited 26 October 2014]. Available from: http://www.mrsc.org/publications/lgcab08.pdf
  11. ↑ Energy.gov. Secretary of Energy Advisory Board [Internet]. 2014 [cited 27 October 2014]. Available from: http://energy.gov/seab/secretary-energy-advisory-board
  12. ↑ Ideamensch.com. Why Every Startup Needs An Advisory Board [Internet]. 2012 [cited 27 October 2014]. Available from: http://ideamensch.com/why-every-startup-needs-an-advisory-board/
  13. ↑ Dirigogroup.com.au. Startup Business Advisory | Dirigo Group [Internet]. 2014 [cited 27 October 2014]. Available from: http://www.dirigogroup.com.au/what-we-do/business-coaching-advisory-brisbane/startup-business-advisory-brisbane/
  14. ↑ Venturearchetypes.com. Startup CFO | Business Model Design & Development | Startup Advisory Board | Marketing Plans [Internet]. 2014 [cited 27 October 2014]. Available from: http://www.venturearchetypes.com/work/startup/startup-consulting-advisory-board.html
  15. ↑ Hansen F. The Role of Forecasting in Financial Planning | Corporate Finance content from Business Finance [Internet]. Businessfinancemag.com. 2014 [cited 27 October 2014]. Available from: http://businessfinancemag.com/corporate-finance/role-forecasting-financial-planning
  16. ↑ Lorette K. The Importance of Marketing for the Success of a Business [Internet]. Small Business - Chron.com. 2014 [cited 27 October 2014]. Available from: http://smallbusiness.chron.com/importance-marketing-success-business-589.html

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