Costly Errors To Avoid When Forming An Advisory Board

by | Apr 8, 2024 | Money

Most small to midsize agency boards are advisory, not fiduciary boards, and for a good reason.

“Agency owners want advice, but they don’t want to give up control to outsiders,” says Bruce Werner, strategic advisor to private company owners and author of the book Navigating Private Company Governance: The Savvy Business Owners Guide to Developing An Effective Board.

During a recent phone interview, Werner shared a startling statistic: “From 2019 to 2021 there was a 52 percent increase globally in organizations utilizing advisory boards as part of their governance structure.”

“Every agency has its own set of ownership issues, competitive dynamics, and resource constraints to optimize,” says Werner. “As you would expect, private companies vary widely on what they want their boards to accomplish. Setting these priorities starts with understanding the basics of governance.”

Werner is often asked: If you are a privately held company like an agency with five to 200 employees, when is the right time to have a board of directors?

“That conversation usually starts when agency owners realize that they and their teams lack the experience and knowledge needed to address future challenges,” says Werner. “They realize they need help, and project-oriented consultants don’t seem to be the right answer.”

Werner specializes in working with family business owners as an advisor and board member.

The biggest error a private company should avoid is choosing the wrong type of board. Werner says advisory boards fall into three main categories:

Consulting boards. These boards meet one or two days per year (e.g., when there is a pressing issue). The owners buy a day of consulting time from the outside advisors to focus on the issue of the day. An agency with $10 million to $50 million in revenue may start with a consulting board before moving up. Agencies under $10 million typically do not have functioning boards but may form ad hoc groups of advisors. Some use a CEO peer group they join to serve that function (I did that with my agency through Vistage International).

Junior advisory boards. As businesses grow, junior advisory boards pay more attention to the following issues: management depth, long-term planning, organizational capabilities, and crisis management (usually involving the bank). Advisors are raising important questions and helping to solve existential problems. However, the discussions often tiptoe around delicate issues like management performance, compensation, and succession planning.

Full advisory boards. This type of board is most comparable to a fiduciary board. Outsiders are actively engaged in succession planning, management, and performance evaluation. This is more common with big agencies that bring in over $100 million dollars in revenue because the

complexity forces ownership to seek outside help.

Werner stresses that the sooner the appropriate type of board is determined, is installed, and gets in sync with the needs of the agency, the sooner they can get to the important work of growing the business, preparing it for sale, or transitioning it to the next generation.

Henry DeVries

Henry DeVries is the editor of Agency Owner News and the CEO of Indie Books International. He is the host of the Agency Rainmaker TV Show, editor of the Agency Rainmaker Newsletter, and the author of 20 books including Marketing With A Book For Agency Owners.