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Ten Reasons not to develop an advisory board

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With apologies to David Letterman: Ten Reasons not to develop an advisory board

Ellen Frankenberg, Ph.D.

One of the most significant factors determining the survival and success of family firms, according to a 1997 Mass Mutual Survey of U.S. family businesses, is a board of advisors. Yet the 2002 American Family Business Survey found that almost half the boards meet only once or twice a year, 61% don't compensate directors, and one-fourth of family businesses say their boards make "no contribution" at all.

During tough economic times, it's particularly puzzling that so many family firms resist an effective tool that most U.S. corporations utilize. Why do very smart entrepreneurs continue to ignore a strategy that promises great long-term payoffs for them and their successors? They must know something that we experts have missed.

I think it's time to borrow a page from David Letterman. And so…. here are the top ten reasons not to develop a Board of Advisors:

10. No one "good enough" will want to serve on my board. When Jay Schindler, President of ESKCO, a Dayton, Ohio firm that provides promotional marketing and corporate packaging solutions, took over as the second-generation leader of his family company, he and his father, Jim Schindler, re-thought their requirements for a board. Jim contacted Clay Mathile, who built the Iams pet food company into an international brand, and had recently sold it to Procter and Gamble. Clay agreed to serve on the ESKCO board and to help the Schindlers re-structure it to meet the needs of their growing business. "We have incredible talent helping us," Jay reports today. "It was the best thing we could have done for the business."

9. I don't want to upstage my current advisors. When you're making decisions about what is best for the business, the focus needs to be on what is best for the business- not your advisors. A board offers the opportunity to expand your circle of experts beyond your lawyer and your accountant. Strong outside board members can look at your business with fresh, practical eyes (especially if they have already managed companies one step ahead of yours) and improve the bench strength of your management team without expanding your payroll.

8. I have no idea whom to choose as board members. Consultants regularly help business owners identify potential board members. Your current network of advisors - bankers, accountants, lawyers, friends, trade associations, Chambers of Commerce - can help you build a short list of potential candidates. You and other family members can then interview the top two or three candidates until you reach a consensus about whom you would trust to serve your business best. Bringing on two advisors at the same time may offer the candidates some support as they enter into your unique way of managing a business.

7. I don't have time to work on one more project. Board development may not be urgent, but it will save you time and money in the long run. Especially if you're considering passing the business on to the next generation, board development becomes an essential part of that process. As you begin to enjoy the golf links or the warmth of southern Spain, a strong board will help you savor your time away more completely. You can chair regularly scheduled meetings four or six times a year, where others besides yourself will challenge the next generation with non-parental, business-like voices, and you won't worry alone about the balance sheet. Your bankers and other investors will become more confident, knowing that the company's future doesn't depend on your heartbeat alone.

6. I don't want outsiders to know about our problems. Families cherish their privacy, for many good reasons. But the Chairman of the Board of a closely held business does plan the agenda for board meetings. Sometimes the risk is worth taking. Outsiders can take the heat about thorny issues like realistic salaries for relatives, and, perhaps, point out problems you didn't even know you had.

5. I don't think we have enough issues to discuss. A typical board agenda might 1) review management's implementation of the strategic plan, 2) compare last year's financials with this year's, 3) help determine the feasibility of expanding into a new region or product line, 4)discuss reports from department heads or develop criteria for selecting the next CEO. Imagine- if you had the best business brains in your region providing you with a "think tank" as you tackle tough issues like these, would you really rather face all this alone?

4. A board will slow down our decision-making. As companies move successfully from the founding entrepreneur (the single decision-maker whose entire strategic plan was scrawled on the back of an envelope) to a management team, well-planned meetings become essential. Developing a board may well slow down your decision-making, but as your company becomes more professionalized, that may be precisely what works best. Rushing to put out one fire after another may suit a start-up with little at risk, but not a 26-year-old company with 31 employees.

3. Directors will be too concerned about liability. Many family business owners develop "Boards of Advisors" who meet together with the legal "directors" to share information and expertise, even though the family stockholders alone take the final vote. This may diminish the exposure of outside "advisors" and reduce the risk of their liability. Of course, the laws of your state, and your own legal counsel will need to be consulted about specific board requirements. Liability insurance may be purchased to secure the commitment of the best candidates.

2. If I pick the wrong people, how will I get rid of them? Terms of office make sense, and some simple written expectations in an introductory letter can clarify goals until more formal by-laws are developed. A first term may be one year, so that there is an exit opportunity for all parties. After that, terms may be staggered for two or three years, to maintain continuity, and to provide outside advisors with enough knowledge of the business over time, so they can provide well-informed counsel.

And the number 1 reason not to establish a Board of Advisors:

1. I don't want to give up control. Ironically, developing a Board of Advisors may actually be one of the best means to maintain control, especially if your company grows and prospers. If you ever actually decide to retire, the role of Chairman of the Board may suit you very well. As Chairman, you can convene the board four or six days a year, review the financials of the business in a systematic way, tap the brains of those who can best help your business prosper, retain authority to hire or top management, and develop a sounding board to test the fresh ideas of the next generation. Sounds like a good plan to maintain control, without camping out in the office everyday.

And maybe you too, will someday say along with Jay Schindler, "It was the best thing we could have done for the business."

 

 

Dr. Ellen Frankenberg, President & CEO

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