Key Elements of an Advisory Board

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In an earlier article I outlined seven reasons why you may want an Advisory Board for your family business. In this article I discuss the two key elements to setting up an Advisory Board to ensure it is a good fit for you and your business.

They are:

  1. Establishing a structure for the Advisory Board that will allow for it to function effectively, and
  2. Having the right people on your Advisory Board.

These two elements are interdependent, with membership influencing the structure, and the structure being tailored to the membership and the business’ needs.

The structure for the Advisory Board should be outlined in a written document to which all members sign on. It would include such things as:

  • the purpose of the Advisory Board
  • who are the members
  • roles and responsibilities (including whether it is simply an advisory role or whether there are any authorities or responsibilities)
  • how often it meets (and whether in person or by teleconference)
  • annual strategic planning retreat
  • identify the information to be shared and how often (e.g. quarterly financials, strategic plan update etc.)
  • confidentiality and restrictions on use of information

There should also be an individual agreement with each Advisory Board member that outlines the term of their appointment (and termination) and any remuneration.

The people you will have on the Advisory Board will depend in large part upon the need that is being filled. In deciding who to approach, you should reflect on the reasons for having an Advisory Board and make sure that you appoint people who are going to fill those needs. For example, if the business could benefit from someone with particular expertise or experience, you will seek them out. If current management needs someone who would be a strong independent thinker (and challenge them on the conventional ways of running the business) then you would appoint someone with that character. Members of the Advisory Board can include family members but there should also be non-family members. I suggest at least two non-family members (so that one is not a lone wolf up against the pack).

With careful attention to these two essential elements, an Advisory Board can be very empowering for a family business, and contribute greatly to its future growth and sustainability. It can also play an important role in supporting the transition of management to the next generation, or the future sale of the business.

7 Reasons for an Advisory Board

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An Advisory Board can be critical for the continuing success, growth and sustainability of a family business.

Here are seven reasons why you might want an Advisory Board for your family business:

  1. Your industry is evolving and you are not sure the direction your business should be taking. An advisory board can provide you with expert advice and direction that could help your business keep pace with changes.
  2. You want to be more strategic in the approach for your business but don’t have a forum to deliberate and thoroughly think through new ideas. The right Advisory Board can help you identify the opportunities and assess risks.
  3. Everyone who is directly involved in senior management has similar views and is prone to following the founder’s lead. The business could benefit from an objective and independent sounding board that could help vet ideas and steer away from unwarranted risks.
  4. Some of the senior management (or family members involved in the business) struggle to communicate effectively with each other. The Advisory Board platform could help to greatly improve communication and the sharing of ideas.
  5. There are family members who are not directly involved in the business, but who have experience and/or expertise that would be valuable to the business. The Advisory Board would be a way to take advantage of their expertise in a structured way, without them having to be directly involved in the day to day operation of the business.
  6. You are not very far along on a plan for the succession of management and if you became disabled or died suddenly, the business would suffer. An Advisory Board can help to provide some continuity until replacement management is put in place and/or the business is sold.
  7. You want to slow down and be less involved in the business. An Advisory Board could help you to reduce your involvement and it could provide valuable support and guidance for your successors as you do so.

Note that an Advisory Board is different than the formal Board of Directors. Every corporation must have a formal Board of Directors and there are certain legalities, responsibilities and liabilities that apply to a Board of Directors. An Advisory Board does not have such legal requirements and its role and structure is customized for the particular business it supports. As such, it has the potential to have a much greater impact.

Any one of the above seven reasons would be a good reason to have an Advisory Board. In my experience, most family businesses will have many.

The “In-Law Factor”

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When it comes to managing a family enterprise and in particular, its transition to the next generation, it is important to pay attention to the “in-law factor”.

As their children marry or enter into longer term relationships, many business owners become concerned about the impact their daughters-in-law or sons-in-law will have. They worry about their in-law’s influence on their child. Moreover, they are fearful about the affect on the business if their child’s marriage or relationship should fail. The concern is understandable – we have all heard stories of how businesses have suffered or failed when there has been unresolved conflict or relationship breakdown within a family.

There are a number of steps that can be taken to help manage the in-law factor, and in fact, help turn it into a positive factor within the family. Some of these steps involve more technical legal matters, and others are about supporting and nurturing family relationships within the business environment. Here are the top five steps to help manage the in-law factor:

  • Communication – There is nothing like inadequate communication to foster an atmosphere of suspicion and distrust and to create conflict.   Appropriate communication between generations and among all family members, including the in-laws, is essential. This usually does not happen by accident and with business families it is important to have a formal structure, such as a Family Council, for appropriate communication about the business and the family’s involvement in it.
  • Roles and responsibilities – When family members have a clear understanding of their roles and responsibilities, this provides them with more security and reduces the uncertainly that can lead to tension and disputes. It also helps to manage expectations. Roles and responsibilities should be clear for not only those family members involved in the business, but also those that are not directly involved and play a “supporting role”.
  • Marriage Agreement – When it comes to protecting the ownership of a business, a marriage agreement can go a long way. However, this is best done before the family member is married (or enters into a common law relationship). (Trying to do it after they are in a relationship is not impossible, but it is definitely more difficult.) Set the expectations early with your children (and their partners), knowing that that is something that will be required.
  • Ownership structure – How a business is owned is critical to minimizing the business’s exposure to the breakdown of relationships. There are different avenues that can be used to help manage this, including the use of trusts.
  • Shareholder Agreement – It is critical that there be a Shareholder Agreement for a family enterprise. One of the important sections of the agreement will stipulate what happens to a shareholder’s shares should their marriage or common law relationship fail, including a methodology for valuing the shares at that time.

The business stories involving in-laws can have happy endings, but even the good news stories reveal that it was as a result of careful management and proactive steps taken to make it work.

By taking the five steps outlined above, you can help ensure your business does not get derailed by the “in-law factor” and in fact, it can lead to your in-law relationships having a positive impact on your business and the family.