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Board of Advisors/Directors

Executive Tools

  • Executive Summary
  • Self Assessment Checklist

Expert Practices Article

  • Creating a Board of Advisors/Directors
  • The Advisory Board
  • Board Benefits
  • What Happens in the Boardroom
  • Duties and Functions
  • Compensating Board Members
  • Limits to Effectiveness
  • Recruiting Candidates
  • Insurance and Liability
  • Committee Work
  • The Future Corporate Board

Case Histories

  • Keep Board Small and Always an Odd Number
  • Use Board for Strategic Issues
  • Invite Seasoned Business Leaders to Serve on Board
  • Start Out with an Advisory Council
  • Establish Clear Objectives and Expectations
  • Comprise the Board Primarily of Outsiders

Tools & Analysis

  • Self Assessment Checklist
  • Top Ten Tools for Creating a Great Board
  • Qualities of the Best and Worst Corporate Boards
  • Top Ten Tools to Bring Any Board Up to Speed
  • Top Ten Tools for Making Boards More Effective
  • Nine Principles for More Effective Boards
  • Ask Ten Questions Before Joining Any Board

Book List: Board of Advisors/Directors

Request the Entire Best Practice Module: Board of Advisors/Directors

CEO Best Practice: Board of Advisors/Directors

Executive Summary

  • The Advisory Board
  • Board Benefits
  • What Happens in the Boardroom
  • Duties and Functions
  • Compensating Board Members
  • Limits to Board Effectiveness
  • Recruiting Candidates
  • Insurance and Liability

Creating the Board

In today's fast-changing times, corporate leaders and CEOs are certainly in need of helpful guidance. Too often, they're isolated in their decision-making process and suffer from a lack of seasoned advice. According to TEC experts Kraig Kramers, Paul Lapides and John Zaepfel, one solution to this dilemma (in addition to membership in TEC) is creating a board of knowledgeable, well-connected peers to help your business grow and prosper.

The choices -- an advisory board or a board of directors -- depend on each company's individual situation. A formal board of directors has legally defined responsibilities, foremost among them representing a corporation's shareholders. A board of advisers can have a more flexible mandate, offering assistance and management advice to the owner/CEO without any binding legal authority.

The real value lies in bringing in men and women who have skills that the company's management team lacks. "Look at your present corporate make-up," Kramers says. "What's missing? Would it help to have more input in marketing, technology or finance? What about seeking assistance from people in other industries who have faced and overcome obstacles similar to your own?"

All three experts stress: owners/CEOs who take the time and expense to form a board should be absolutely committed to consulting it on important issues. "It may be hard at first to listen to objective feedback on your business decisions, but in the long run this is preferable to blind allegiance from family members or employees," Lapides says.

The TEC experts offer these action steps for constructing a board:

  1. Admit you don't know everything. "You're an expert when it comes to your own business," Kramers says, "but sooner or later you see there's a great deal you don't know about trends and market forces in the larger business world. That's where other people come in, men and women whose skills and talents complement your own."
  2. Develop a candidate profile. Create a profile of the individual you're looking for, particularly the expertise and knowledge base you feel are needed to address your company's challenges in coming years.
  3. Ask for help. Solicit names from your attorney, accountant or other professional advisers. Kramers suggests using the TEC Network for suggestions on finding great board members.
  4. Look for a good mix. A healthy board of directors/advisors often includes a legal expert, an accountant, a marketing professional and financial advisor. Other good candidates are successful entrepreneurs from industries completely different from your own who have "been through the mill" and can look at your business with a fresh eye.
  5. Be clear about what you want. Take time to talk with prospective advisers. Let them know what your goals are. Make clear that you don't want people to rubber-stamp your decisions. You're looking for individuals who can challenge you and help your business grow.

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The Advisory Board

Unlike a formal board of directors -- whose primary function is representing the interests of shareholders -- an advisory board is designed to provide independent advice and counsel to the owner/CEO/management team. Directors are elected, charged with fiduciary responsibilities and must be covered by the business with some form of liability insurance. Advisers don't come burdened with such risks and responsibilities.

Advisory boards vary in size from as few as two or three members to up to forty. "The right size depends on your company's stage of development, complexity of business and other factors," Kramers notes. "For most growing companies, an advisory board of four to seven members is sufficient."

Before creating an advisory board, however, an owner/CEO must be very clear about what is expected from it. "Ask yourself: Do you want these advisers to give you objective guidance or just blindly endorse your decisions?" Zaepfel says. "Everyone's happy when the board agrees with your actions. What happens if and when their advice conflicts with what you want to do?"

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Board Benefits

To the TEC experts, the benefits of having a board of advisors/directors are so clear-cut, there's little reason not to have one. A board offers:

  • In-house experience and expertise
  • Enhanced corporate self-discipline and accountability
  • Objective opinions
  • Strategic planning and counsel

Honesty is another virtue offered by independent advisers, Lapides notes. Unlike family members or management insiders who often comprise membership on family-owned business boards, outsiders come without any agenda or prejudice linked to the company's family origins.

Equally valuable is what a board prevents the CEO from doing. "An informed board can save your company from making expensive mistakes," Zaepfel says. "A group of professionals with a broad range of skills and know-how -- including, say, marketing, banking and investment specialists -- have learned the hard lessons of running a successful business. They can help your business avoid costly pitfalls."

"One major obstacle to exploiting the value of a board lies in the CEO's strong-willed personality," Lapides says. "Listening is frequently a big challenge for business leaders. The CEO has to develop a skill for listening and being respectful of other opinions."

Tips for effective CEO-board communication include:

  • Keep the board informed. Even when the board isn't scheduled to meet, send them information relating to industry issues and specific company matters.
  • Give the board time to prepare. By providing material ahead of the meeting, you enable board members to move through the agenda more efficiently and make the meeting itself more meaningful.
  • Sharing significant information builds trust. Directors who receive significant company data on a regular basis learn to trust the CEO/owner. When information is withheld -- or board members are constantly required to obtain it themselves -- trust gets eroded.
  • Set the long-range agenda. Identify the company's goals. Clarify and define challenges and situations. Focus on priorities and articulate your course of action.
  • Motivate members. In your leadership role, you can inspire advisory members, stimulate their desire to give all they can and bring a shared sense of purpose to the group.

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What Happens in the Boardroom

Lapides suggests that each meeting have a special focus -- strategy, financials, human resources, etc. -- with presentations made by different members of the management team. "Be sure that board members are prepared in advance by distributing relevant information for them to study prior to the meeting," he advises.

The TEC experts offer other suggestions for preparing members ahead of time:

  1. Mark the envelope "Board Meeting Notice." A good way to get your board member's attention: place a red stamp reading "Board Meeting Notice" on the outside of the mailing envelope. Send this material two weeks ahead of the scheduled meeting.
  2. Just the facts, please. The board meeting notice should list times, dates, location and specific details about the upcoming meeting's goals and objectives. Leave out "fluff" materials or highly detailed page-after-page of numbers.
  3. Make a reminder call. A week before the meeting, the CEO or a fellow board member should call each member and, if possible, speak directly with him or her. It's a good opportunity to generate enthusiasm for the upcoming meeting -- and in the process build stronger rapport between members.

"In the meetings, do everything possible to schedule vital matters first," Lapides advises. "Some items inevitably get pushed back to the end, and they're always the first to get lost when members have to rush to catch a plane or make another appointment."

The TEC experts offer these guidelines to make the most of precious boardroom time:

  • Use a "consent calendar." Often, any number of items requires formal board "approval," but do not in themselves merit much discussion. One technique for handling these items involves bundling them into a "consent calendar." Send them to board members ahead of time, then have them approved all at once at the meeting, thus saving time for more important topics.
  • Reasonable limits on discussion. The board Chair or CEO may find it helpful to set time parameters for individual topics under review. This doesn't necessarily mean fiercely restricting each discussion. Simply make clear to members that the board needs to complete all items by a specified time.
  • No dog and pony shows! Your advisers/directors are serious, thoughtful individuals -- unlikely to be swayed by glitzy power-point presentations or colorful audio-visual displays. Give them the information they need to prepare themselves beforehand; anything presented at the meeting itself should supplement this material in a concise, efficient manner.

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Duties and Functions

In general, board functions include:

  • Establish corporate objectives and policies
  • Enhance CEO and senior management effectiveness
  • Act as arbitrator between major stockholders (board of directors) or during family control issues (board of advisors)
  • Act during a crisis, such as the death or departure of a CEO
  • Lend credibility to investors, customers and vendors
  • Plan strategy development
  • Make key introductions

All boards share certain responsibilities that should be clear to each member when they agree to serve. These include:

  • Attendance. At its most basic, members must agree to attend board meetings and agree to take part in some committee work.
  • Planning and support. Board members should be involved in reviewing the company's fundamental purpose, priorities and goals. From there, members should oversee and evaluate strategic business plans, and support management in carrying out these plans.
  • CEO monitoring. In publicly held companies, the board of directors is legally responsible for selecting the CEO, approving executive compensation and, if necessary, dismissing this individual. Regular assessment of CEO performance is another key function.
  • Finances. A formal board of directors approves a company's annual budget and ensures that the company adheres to it. The board can also contract for an independent audit; review financial performance against budget, prior years and competition; control investment policies; and manage capital or reserve funds.
  • Board effectiveness. Board members should be able and willing to assess their own performance. They must effectively monitor themselves for results, practices and organization. A board must govern itself.

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Compensating Board Members

"Board members deserve to be paid," Kramers says, "but compensation should be linked to the company's performance. This demonstrates that both sides have made a commitment to the value and seriousness of the relationship."

Kramers suggests that typical advisory board member payment ranges from $8,000 to $25,000 per member a year. Paying for travel and lodging is customary as well. "I also recommend that members purchase some form of equity participation, so that -- particularly in public companies -- board members are involved in the same way as shareholders are."

Zaepfel suggests that directors of publicly held companies be paid per meeting, with a retainer in place (and stock options). Depending on size, he says, payment usually ranges between $1,500 and $2,500 per meeting, with a monthly retainer of $1,500 to $3,000.

In many companies, Lapides says, compensation ranges from as little as $500 a meeting to $5,000 to $6,000 a year (part retainer, part meeting fee). "Stock options are acceptable, if the company has a lot of stock options to offer," he says. "Board members can buy a specified number of shares for a specified number of years."

"Consider deferring the issue of compensation until after you've selected a member," Lapides says. "Personally, I don't like to see individuals join boards simply for the pay. You want to see in that person's face that serving this company is something they'll find fun and exciting to do. You don't want to sell someone on joining your board. Share your business goals and objectives and see if the person responds enthusiastically. Many companies determine appropriate compensation after they form an advisory board."

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Limits to Board Effectiveness

In general, the primary reasons for a board's lack of effectiveness include:

  • Incompatible or disruptive personalities. Board members are human like the rest of us. They don't always get along. Even a board made up of skilled, experienced individuals is of little value if members can't work together for the good of the business.
  • "Too many cooks." When a board has too many members, some of them inevitably "take over" by virtue of their strong personalities, and seek to dominate the others. In these cases, the business loses the benefit of what the more passive individuals might have to offer.
  • Insufficient compensation. It's proper and necessary to compensate advisors/directors for their contributions to the board. Make sure fees for board members are appropriate, or you may find yourself with a board of less-than-dynamic quality.

"Very often, you don't have to look any further than the CEO when a board isn't functioning," Lapides says. "One common problem is a lack of communication. Board members can't provide value to the business if the information they receive from the CEO/owner isn't timely, honest or broad enough."

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Recruiting Candidates

"The best candidates combine solid business thinking, personal integrity, an ability to analyze problems and who also want to work with others," says Zaepfel. "They should be able to speak for your customers so the focus stays on doing everything possible to give people what they want now and in the future."

Other advice:

  • Look for a track record. "Broaden your candidate search to include at least one CEO or senior executive who have expanded their own business by at least two or three times," Zaepfel says.
  • Appeal to a candidate's sense of challenge. The challenge of serving on a board and helping a business grow isn't so very different from building your own business. Seek out people who respond enthusiastically to the intellectual challenge of bringing a company to a higher level of achievement and success.
  • Choose someone who's confidential by profession. Attorneys, accountants and recruiters are frequently a wise choice as advisory board candidates -- both because of their experience and knowledge, and because they're bound by their positions to confidentiality.
  • To locate potential board members who are "the right fit," the TEC experts suggest the following guidelines:
  • Match strategic goals with strategic individuals. Are your expansion plans likely to involve new initiatives in human resources, technology issues, raising capital, etc.? Knowing your long-range goals helps guide you toward the type of people with experience and knowledge in these areas.
  • Don't be afraid to ask for help. If your own search doesn't prove fruitful, consider going to a professional recruiter. They'll conduct an assessment of your company and suggest candidates who will likely make a good match.
  • Good talent doesn't come cheap. You don't want to choose someone who's in it just for the money, but remember that men and women with proven experience and skills expect to be reasonably compensated for their time and efforts on your behalf.
  • One director can lead to another. So you've landed an outstanding individual to serve on your board. "The next logical step is asking this person for other recommendations," Lapides says. "A valuable board member brings his or her own network of contacts and is likely to know others who specialize in areas you're interested in."

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Insurance and Liability

"Good insurance protects directors' personal assets against liability sustained in the course of their duties," Kramers says. "Implied in this is the understanding that the director or officer has acted honestly, in good faith, and with a commitment to what's best for the company."

The most common type of coverage is called Directors and Officers (D&O) insurance. "This protects directors from having personal liability in the event that the business is sued," Zaepel says. "For advisory boards, preparing a letter of indemnification is a worthwhile precaution."

Some guidelines to keep in mind when assessing D&O liability policies offered by different insurance carriers:

  • Learn about the carrier. Take time to investigate the insurance carrier's reputation and track record, including (a) number of claims defended; (b) financial strength; (c) payout history; (d) defense attorney profiles; and (e) record of reimbursement of defense costs.
  • Know the terms. Ask for an executive summary of the policy and an expanded definition of all terms. Also inquire about exclusions.
  • Look at D&O coverage separately. Even if you're considering the purchase of D&O coverage as part of an overall corporate insurance program, examine this part as a separate entity. It may work better for you this way.
  • Keep your options open. There's always the possibility that premiums will go up at each annual renewal period. One way to avoid this financial trap is buying a multi-year policy to lock in coverage and rates beyond one year. Kramers adds: "Even if they cost the same, different D&O policies provide amazingly different coverage and loopholes. Get an expert to look closely at your policy and its exclusions."

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The Future Corporate Board

As for the outlook for corporate boards of directors, the TEC experts have these predictions:

  • Greater familiarity with technology. Board members, like executives everywhere, have to keep pace with changes in technology. Expanded knowledge in this area (and with issues relating to the global marketplace) will help them advise CEOs on future changes.
  • More diversity of skills, experiences and people. "The typical board of directors will no longer resemble a country club environment where all members look alike," Zaepfel says. "A board lacking the diversity of minorities, women and younger executives simply won't work."
  • Demand for specialty skills. The resource pool of qualified directors will continue to be fairly small, but demand will grow, especially for individuals with specialized skills who offer valuable input on board commiteees.

The TEC experts identify these likely trends for advisory boards and boards of directors:

  • Outside directors will gain prominence, surpassing the number of insiders on boards
  • More retiring CEOs will leave company boards. Presently, only some thirty percent of American businesses require a retiring CEO to vacate his or her board position.
  • Boards will increasingly conduct formal CEO performance reviews and board self-evaluations. This practice will likely become standard practice within the next five years.
  • Directors will be required to own a specific dollar amount of company stock, as a way of enhancing their personal commitment to the business.
  • More board meetings will take place without the presence of the CEO. Companies are recognizing that, in the present fast-paced environment, board members can contribute even if the CEO is busy elsewhere.

"Boards throughout all types of business are moving in the right direction," Lapides says. "Especially in start-ups and companies forming boards for the first time, leaders understand the value of getting objective, knowledgeable guidance. Traditional companies are still struggling with the need for outside board members -- up to eighty percent of private companies don't have any! -- but the writing is on the wall. Advisers bring guidance and direction to a business. The only other place you'll get that kind of help is in your local TEC group."

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