Boards, Director’s Liabilities and Advisory Boards

I’ve already covered the topic of Corporate Governance …. refer to https://investoritis.wordpress.com/2010/03/27/what-does-good-governance-look-like/ for further details on Good Corporate Governance.

I thought it useful to expand into some other areas:

[1]   Directors and Officers Liability insurance.

[2]   What about Advisory Boards, which are typically non-statutory (except in medicine/pharmaceuticals) ?.

Directors and Officers Liability insurance.

So, you’re a Director and you don’t have D&O Liability insurance …. ARE YOU MAD ???.

I strongly suggest you go to http://www.companydirectors.com.au/About+Directorship/Director+role/Director+Liability/?LM to understand your personal liabilities as a Director.

I also suggest you go here http://www.companydirectors.com.au/Membership/Member+services/DandOInsurance/Forms+of+DandO+Insurance/ to see what options are available to you for D&O Liability insurance.

Advisory Boards.

The Role of Strategic Advisory Boards

Business advisory boards fill a unique role in strategy and implementation, whether a company is crafting a new product line, identifying cost-cutting measures, pursuing mergers and partnerships, or changing the mix of staff skill-sets.

PE & VC firms especially recognise the ROI of applying specialized executive talent to rev-up progress at an operating company, typically through a 100-day plan at the commencement of their acquisition.

Growing (and struggling…) businesses, investment firms, lawyers, consultants and individual executives suggest that advisory boards are powerful, long-term strategic tools if you invest in managing them well.

However, many firms don’t know where to find outstanding board members or relegate them to 2-to-4 meetings a year and a few phone calls.

Advisory Boards Are Not Your Usual “Boards” or “Consultants”

Strategic advisory boards are unique business support system, best-defined as:

  1. Non-employee teams tasked explicitly with serving senior management;
  2. Having extensive experience and special expertise in sectors/functions that affect a business;
  3. Meeting together over the year, but they can and should focus on urgent business decisions over the course of several months for the best impact;
  4. Well compensated for the value they bring to a business, ensuring they’re in commercial alignment.

They differ from:

  • Boards of Directors, or fiduciary boards, which take on the responsibility and liability of being responsible for the financial well-being of a company’s shareholders and for evaluating the chief executive.  Boards of Directors are required for public companies, but they’re often populated with influential individuals with powerful connections or access to investors, rather than industry specialists.  BoDs also are expensive to staff, costing five-to six-figures per member per year, to offset the increasing amounts of time and risk fiduciary board members take on.  For public companies with divisions that need strategic help, or private companies that need broader business input without being evaluated on a management hire/fire criterion, strategic advisory boards are more valuable.
  • Consultancies, whose pyramid-like team structure and billing rates make them suitable for critical projects of 1-to-6 months requiring deep analysis, but less so for ongoing guidance about growth opportunities and trouble spots.
  • Friends of the firm, a category which includes advisors who aren’t compensated for their input. Usually these relationships are developed ad hoc, based on chance meetings or existing relationships, where the company’s leader/evangelist convinces the businessperson to lend their name and be on a few phone calls in exchange for light cache.  Though these individuals may receive an Advisor title on the web site, without careful selection of a group of complementary skill sets and a commitment to exploring issues at length with the firm, they usually have limited impact.

Achieving an Effective Strategic Advisory Board

High level considerations when building an effective and worthwhile strategic advisory board include:

  • Compensation model. A modest amount of cash goes a long way in getting the attention of potential advisors, and a little equity on top (a fraction of a percent) keeps their minds engaged even when not attending meetings.  The total cost of many advisory boards, meeting regularly, helping with multiple decisions in detail, can be less than that of a single senior employee and less than 1-2% of equity for a start-up.
  • Information sharing. Too many advisory boards meet semi-annually, and beyond that are contacted individually by phone.  That’s because the company’s management team has a lot on their plate and lose track of the time investment needed to support the board.

    Anyone who has been in a consulting field realises how critical an understanding of a business’s culture, it’s operating metrics, and competitive context is to making effective decisions.

    Therefore, advisory boards can benefit from a light “information portal” where they can read a summary of relevant news and data, post ideas for discussion online immediately or in-person at the next meeting, and track results of programs.

  • Evolution.  For strategic advisory boards, some members will prove useful advisors over years, while others will be a best fit for specific projects.  Both members and the company should explicitly discuss how their needs change and set 6 to 12 month reviews of their relationship.  This makes it easier to switch to a looser “stay in touch” commitment with existing board members, while introducing new talent to reflect the changes in the business.
  • Facilitation.  Good advisory boards are comprised of a range of personalities and experiences that interact with management to come up with new solutions.  But this isn’t easy.  Think about staffing a consulting team where each member worked at a different firm, in a different location, put in an “all members are equal” starting situation.Instead, effective boards explicitly establish and regularly refine their rules of engagement, including scope of responsibility (for example, is management open to the board proposing new programs or highlighting company problems that management hasn’t put on the agenda), conflict resolution (including the acceptance of vigorous debate and approaches to recognize and address personality conflicts), meeting agendas and between-meeting time commitments.

    This facilitation itself takes a special skill set and experience base.

  • Commitment.  All of the above point to a shared commitment to exchanging information, researching opportunities, and improvement processes that have to occur during and between meetings.The board needs to be thought of as a strategic weapon, focused on top-of-mind questions, rather than a “nice to have on the website” marketing tool to be worth creating.

    In turn, some members will want to contribute even more time to your business, for example, editing an investment plan or QA’ing a major implementation plan.

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