The Case for Small Business Advisory Boards

Steven Wilkinson on advisory boards

It is absolutely crucial that the list be kept free of people who are considered simply because they might be hurt or insulted if they were not included. These folks somehow always manage to end up on the board, and they are mostly disastrous.

By Steven Wilkinson

The best advice on dealing with boards was written 500 years ago by Niccolo Machiavelli in his (unjustly) infamous book The Prince. In Chapter XXIII in a section titled “How Flatterers Should Be Avoided,” he wrote, “A prince who is not wise himself will never take good advice.”

I have been on advisory boards myself and have had my own boards of directors in my own companies. In my experience, the most useful board members are leaders/business owners who have recently retired: their networks are still fresh and relevant, they are respected in their industry and are keen to put their knowledge and experience to work. I was lucky to engage a brilliant manager from Daimler in the early noughties, just after he had retired after an outstanding career as troubleshooter and firefighter for smaller supplier companies within the group. I was running a rapidly expanding investment group and, frankly, was in over my head.

His calm, measured, decisive and insightful wisdom, which never questioned my leadership position but often questioned my personal motivation and decision-making process, became invaluable to me and I learned to use him as a sounding board, scratching post and challenger for almost every decision of import. He alerted me to my blind spots, watched out for me and was in every way a trusted advisor. Along with my chairman, they provided a powerhouse of political contacts, reputation, managerial expertise and bullshit detection that were of enormous value to the business. Dr. Hans Blume died far too young in his late 60s on the eve of the Great Recession, and I felt his absence sorely in the years that followed.

In the years since, I’ve observed that my experience was very much the exception. A favorite meme among entrepreneurs is that of the lonely business owner isolated at the top of the organisation, shouldering Atlas-like the concerns and weight of the world as it crushes them relentlessly. The burden of ownership is indivisible and unshareable. The buck stops here.

I think this is nonsense. While it is true that ownership confers with it an ultimate responsibility and that truly the buck has to stop somewhere, there is no reason that weighty decisions or indeed any decisions need be made in isolation or that leadership of a private business requires solitary confinement.

Public companies and institutions mandate boards of directors composed of executives and non-executives for very good reasons: to prevent abuse of power, to act as a sounding board, to ensure compliance with regulations, to ensure accountability, and to provide nuance and perspective. This is not the place to go into how decisions made in committee can produce banal outcomes, how boards can be manipulated by dominant CEOs who know how to play the game or can morph into battlegrounds for personality conflicts. There are good and bad boards just as there are good and bad anythings. The question here is whether the establishment of some form of board-like structure can mitigate the feeling of isolation for the owner of a small business and what, if anything, large company boards can teach their smaller cousins.

Community of Competence

The first thing to recognize is that every business, from a company of one to an established mid-market player is at the center of a “community of competence,” whether it recognizes it or not. That community is made up of the company’s professional advisors, accountant and lawyer, its bankers and financing partners, the trade body that represents its industry, its local chamber of commerce, possibly its marketing or advertising consultants, ex-employees who have gone on to other careers in the industry as well as mastermind groups or entrepreneurial organizations like YPO or EO that the owner may have joined.

As with all things in business and life, awareness and intention are the key to forming and directing the resources already available to the company in its ecosystem to its best (mutual) benefit. Garbage in, garbage out or the Law of Karma, depending on whether your background is IT or mysticism. By which I mean, thinking about installing a board of advisors or some formal or semi-formal structure of people to assist the leadership only makes sense when the company has understood and mapped out the depth and quality of the community of competence already available to it and then begun the process of determining which competencies are missing, which ones need replacing and, finally, how the community would be enhanced by installing specific specialist competencies in the format of an advisory board and actively seeking those.

So a useful place to start is to conduct an audit of the current state of the community of competence in which the company is embedded. The community audit will create a map of the people, their skills and their relationship to the company and to each other that, when mapped against the needs and core issues facing the company, will give the leader a picture of the potential weaknesses and strengths. At the end of this section of the program the company will have a full picture of all the people interacting with the business in a support function. It will have an overview of which skills the business does not have access to that it needs for the next phase of growth. It may be that the map shows that the company doesn’t need a board, just better coordination of available resources. But if it does need one, the map will describe key functions and areas of knowledge that a future board should prioritize and around which it should be organized.

Designing a Process to Build the Board

As with all the best projects, so too the installation begins with a deliberate description of the intention for the advisory board. It helps to start by asking intelligent questions that reveal the motivation and aspirations of the business leader. What do you wish to achieve? What problems will the board help you solve? What does the company look like if the board performs excellently? What is the vision of success? What personal benefits will accrue to the leader? What benefits will the other communities and stakeholders derive from the business? What benefits will the board members derive from involvement with the company?

The questions answered here will form the basis of the board charter—the central document for guiding and informing the board’s work and direction—which is at the heart of the process. Also there should be some discussion here of the proposed remuneration structure, the organizational anchoring of the board, its remit and possible governance attributes.

Going from no board to a fully constituted, say, three-person board requires both a process and a commitment to getting it right. Building the brief is where the work of focusing on priorities and the details of each position is conducted. Based on a maximum of five priority areas identified in the previous mapping work, the leader or leadership team begins to assign specific requirements concerning the internal and external needs of the business to the priority areas (such as sales, family governance, leadership development, processes, regulatory issues, finance, operating systems, bonus systems etc).

Once these have been grouped and prioritized in order of critical importance for the business’ current and future needs, the work of putting names and faces to the positions to be filled can begin. The real purpose of this process is to create intentionality in the advisory board and to avoid the comfort-zone process of just asking the usual suspects and people already close to the company. Board membership always comes with a little feather-preening and people generally like to be on them, so filling positions is usually not the issue. Getting it right, however, finding new experts who will dramatically improve the quality of the organization and create a true community of competence for and inside the business requires pushing through the comfort barrier and committing to a more rigorous process.

The process now looks to the identification of names and nodes, nodes being partners and business associates who bring interesting and varied networks with them. This means working through the leadership Rolodex (if you’re under 40, you may have to Google that term) to pick out all the candidates that come to mind from previous partners, customers and friends as well as official networks (chamber of commerce, guilds, business associations, etc.).

Wish List: Once you have completed the “known names,” it is time to brainstorm some names of people the leader would love to have on board. This is the time to aim high. Added to the original long list this completes the list of potential candidates.

Short List: Once the long list is in place, it is time to start creating preferences and priorities to whittle the list from 20 to 30 names down to 7 to 10, max, with a second “bench” of another 5 to 7. If you have been performing this process as leader on your own, then this is the time to start involving other shareholders/family members and your leadership team. The biggest issue here is much like deciding who to invite to your wedding. It is absolutely crucial that the list be kept free of people who are considered simply because they might be hurt or insulted if they were not included. These folks somehow always manage to end up on the board, and they are mostly disastrous.

For an advisory board of three members, the short list should have a maximum of 9 candidates on the final shortlist, with a preferred list of 3 to 5. In an ideal process, the leader first identifies the person they would most like to see in the role of chair and runs through the recruiting process with that person first.

Once the chair has been secured, the short list and the supporting documentation should be reviewed with the chair. This is important because the chair then takes “ownership” of the resulting board before it has been constituted and has the opportunity to bringing their own network into the process

The Advisory Board is a leadership resource. Properly constituted, it can become one of the most valuable resources for the leader and therefore for the development of the company. To ensure that it fulfills that objective, it is crucial to manage that resource and evaluate the performance and the contribution on a regular basis. Obviously the working relationship between the chair and the leader is critical: if this works well then it pretty much guarantees that the meetings and the interactions between the board members and the leadership team will be fruitful and productive. That means committing to a schedule of regular communication with the board chair and setting times to call and review progress and issues arising.

It is also advisable to conduct a regular audit—probably twice in the first year and annually thereafter—either through an online survey or through interviews organized by a third party as part of a peer review process. These are standard for well-run boards of larger companies, but are just as valuable (if not more so, I would argue) in smaller enterprises.

For the leader, the review is an opportunity to express any misgivings, disappointments, or frustrations with the institution itself or the performance and/or commitment of individual members and if necessary make adjustments. I recommend a one year initial tenure with an option to renew at the end of that first period for a two year period and then to use that initial period to see whether the whole concept of the board and its individual members is working as expected.

How It’s Supposed to Work

Great leaders have great advisors, know how and when to listen to them, and act decisively once they have considered that advice. Installing an excellent advisory board can make the difference between mediocrity and excellence for a small business, but requires commitment, intention and wisdom. Here’s how it’s supposed to work:

Chris runs a successful specialty chemical business. Along with the organic growth the business was experiencing, Chris was keen to acquire smaller specialty chemical businesses operating in niches adjacent to his own, but he had never executed on a transaction. He had recently installed a small advisory board of three industry veterans—one a chemical engineer, one who had run a successful division for a larger chemical enterprise, and one who had sold his chemical plant to a private equity company and retired. Having been superficially looking at deals brought to him by a few business brokers and M&A boutiques for about a year or so, one of his board members rang him to tell him about a subsidiary that his old company was looking to divest.

The business was losing money but had a large production facility not far from Chris’ home base as well as a large order book of relevant customers. His board member—let’s call him Andy—made the introduction to the head of M&A at his old employer and accompanied Chris to the initial meeting. At this point, John, who had recently gone through the due diligence process with his PE buyer and was brimming with process knowledge from that transaction, as chair of Chris’ board, invested a great deal of time creating a competent bench to support Chris in what was rapidly becoming a do-able transaction.

One of John’s first moves was to replace the lawyer who usually represented the business with a legal adviser with a focus on buy-side transactions. Chris told me afterwards that that one move alone probably did more to boost the probability of a healthy transaction than anything else. “Quite frankly, I would not have known that was even going to be an issue, if John hadn’t flagged it on day one and insisted on making the change. We have rolled up quite a few smaller businesses since then and I can tell immediately if the seller is being well-represented or not. Inexperienced transaction lawyers are always looking for reasons not to do the deal instead of figuring out how to make it work.”

Chris ended up doing his first deal for a peppercorn purchase price and trebled the size of his business overnight. Using his full board strength and creating a profit share pool for them, he managed the integration well, and was regarded as a “safe pair of hands” by the seller who then did two more deals with him over the next 5 years. He has created a much better business than he had previously imagined possible.

“Without my board, I would never even have had the balls to make that first deal. I probably wouldn’t even have known about it. I guess I was lucky in that all the board members were fully focused on making the business a success and not making it about themselves. Today, I couldn’t imagine operating without one.”

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