Advisory boards lend sage advice

Advisory boards are meant to enrich a business with fresh thinking and expert overviews but there are two modes of thought when it comes to establishing one.

Some believe that packing in as many people "in the know" in your own industry is the best option, so as to leverage their specific knowledge and contacts.

Others say having experienced non-industry businesspeople whose role is to act as a sounding board and asking tough questions is the best way forward.

While the jury is out, the consensus seems to fall on adopting the latter approach, especially for small companies seeking a new direction.

Advisory boards differ from formal boards. They are meant to have no formal legal standing and no executive function, acting simply as an aide to business strategy, or even, as some proponents describe it, as business coaches.

"The role is to act as devil’s advocate," says Keith Hanslow, a partner at Millens law practice in Victoria who has acted on a number of advisory boards.

"The most important thing is to bring in pure business nous. I may not be coming in with specialist knowledge but I may have relationships that I can use to help the company get things done."

Garry Wayling, a consultant to the strategic growth markets group at Ernst & Young, agrees. He says the best advisory boards “not only give good advice and act as a sounding board, but also have excellent networks.”

The actual term “advisory board” is also something of a misnomer, as the board often consists of a single individual, and very often no more than two people.

Most boards tend to be formed at a specific period in a company’s history, most notably at a crucial stage of growth, or where family companies are concerned, at the point of succession. Often the board is established just prior to a listing or in order to attract private equity.

A board can also help a small company or private family establish accountability, especially if it is seeking outside investment.

“It’s about showing prospective investors the business has actually thought about separation of management and board,” says Wayling. “It’s about proving you are on the right maturity path.”

In terms of who should sit on an advisory board Hanslow says raw business talent is best for business partnerships that have never dealt with even a limited number of shareholders.

Lawyers, corporate advisers and bank executives tend to be the most sought after board members, but members with marketing and business development skills are also valuable. Wayling says search firms are often involved in looking for suitable candidates, with the search firm charged with scrutinising the mandate for a company’s next growth phase and then making recommendations about potential board members.

Wayling says a typical medium-sized business about to seek a listing or private equity should pay an adviser about A$30,000 a year. "Remember you need to get value for money, but it’s also about chemistry," he says. "Can you work with them and what value do they give?"

Hanslow says the fee should be priced as a monthly retainer and a good adviser should attend 12 meetings a year with the company, be readily available for conversations and offer diverse business contacts.

However, he says that as a lawyer he is often expected to give explicit legal advice.

"For A$3000 ($3,700) a month I’m not giving legal advice. I’d have to charge them A$440 an hour for that.

"It’s not what I’m here for, and it’s something you have to be wary of."

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