Advisory boardWhat is an advisory board?

Family-owned businesses often form advisory boards as a source of guidance. Advisory boards differ from the board of directors discussed in this prior blog post in several respects. Primarily, advisory boards guide, not govern, as they do not have legal decision-making authority. When a company is closely held, the owners of the company may select the members of an advisory board. Where ownership spans multiple generations, advisory board members may be selected by the company’s board of directors.

Why would I want one for my business?

The purpose of an advisory board is to expand the business’s circle of trust in order to gain a broader spectrum of knowledge and experience to guide the business. Many business owners view the advisory board as an opportunity to harness expertise that the business might otherwise lack. Unlike owners who serve as both executives and board members of the company, advisory board members are not focused on the day-to-day operations of the business. This distance enables them to provide an objective, strategic, and future-focused perspective in advising the business.

Advisory boards also provide family-owned businesses with a chance to hear an outsider’s perspective—a potential change of pace from the opinions of family members, long-time friends, and employees. Advisory boards can also serve as a neutral group to resolve certain issues, such as transitioning between generations and arbitrating familial disputes. An advisory board can also function as a bridge from a family board to a board with independent members. We will discuss this in more detail in a future blog.

Who should serve on an advisory board?

Successful advisory boards typically contain between three to seven members, although board size and composition should be tailored to the needs of the business and the family owners. Business owners can select individuals that have a preexisting relationship with the business, such as accountants, financial advisors, or lawyers. Family businesses may also choose other experts in the business’s industry and market. Owners should keep in mind the importance of garnering new opinions and perspectives when selecting members of the advisory board.

How do I form an advisory board?

While no formal documentation is legally required to implement an advisory board, we suggest that businesses define their relationship with the advisory board in a written agreement or policy. Some businesses may choose to adopt bylaws of the advisory board or even a charter. Regardless of form, these written documents will serve to memorialize the purpose, parameters and function of the advisory board. Additionally, the board of directors must approve the creation of the advisory board in accordance with the business’s governance documents.