Corporate Advisory Boards: "Show Me the Money"

Tell me, simply: What's the purpose of being in business? We shopped this question around to board members and executives, and heard many different (sometimes long-winded) answers. "Maximize value for stakeholders ― Have a flexible business strategy/model to stay relevant ― Make and sell goods or services ― Get and keep customers ― Derive monetary and psychic satisfaction, and a host of other interesting opinions. However, if you put all their responses into a big pot, lit a fire under it (one I like to call scrutiny), skimmed off all the fat, political correctness, esoteric ideals, and high-fallutin' thinking, you could boil it down to one simple, honest truth: "To make money!"

So what type of board can most directly make you more money? Traditional (governing) boards can, although not always directly, since their activities focus on many other things including compliance, fiduciary duties, long-term protection of stakeholder interests, etc. What about advisory boards? Companies have formed these kinds of board for lots of reasons. Often they do so to deal with  temporary issues like legal/compliance, getting closer to customers, bolstering management, etc.: issues that probably could be more efficiently addressed through consultants. But, for the most part, companies build and keep advisory boards with the long view in mind, and to make even more money.

It's common to see start-ups and high-growth firms use advisory boards to get them over the hurdles, so that they can start or continue to generate more revenues than expenses. But, what's more intriguing is the number of large, global, and/or well-established corporations that are quietly trying to think like entrepreneurs so that they can "get their groove back." In response to this challenge, they are building and using advisory boards to reinvigorate their processes, products, sources of capital, and new business opportunities, among other things. Ultimately, of course, to make even more money. But are advisory boards really worth it? After all, for young and well-established companies, it takes thoughtful planning, time, and considerable resources to build, maintain, exploit, and execute on what they can give you. Apparently, some are convinced.

Recently, International Flavors and Fragrances, a global corporation, built a Scientific Advisory Board. The reason: to enhance their research team's abilities and expand their innovation pipeline. The Advisory Board's internal leader, Senior Vice President of Research and Development, Ahmet Baydar, had the support and backing of the company's CEO and the entire board. Focus, time, and the right resources, have delivered results. Ahmet shared: "This effort has significantly increased our innovation development thresholds. Our Advisory Board members have given us sound guidance, introduced issues, partners, and opportunities that have all brought relevant value to our business.

Mid-cap private companies use such boards to give them extra muscle, or in some cases, to tap the brakes a bit, when needed. Jim Taylor, CEO of Abarta Oil & Gas and Chairman of Abarta, Inc., a diversified family-owned holding company, told of his experience. Having built a board of independent advisors, Jim shared that these folks have "challenged us, made us accountable for our decisions and actions, and pushed us to articulate our objectives and vision more clearly. In addition, the board has helped us identify new lines of business, which equate to new revenues." He added that "without our board I would move more quickly, but probably recklessly, with less measured perspective." The board helped them divest itself of a business it had owned for 63 years (originally bought by Jim's grandfather). "They helped us realize a better value on the business than we could have expected."

Then there's Deutsche Bank Americas: different scale, different industry. A few years back, they correctly decided that their senior team could benefit from having, on tap, a broad and diverse group of globally-renowned advisors. They took the time to focus, find the talent, and commit to building an impressive group. They also made sure that the respect and support went both ways -- as it should with a good advisory board. Bill Woodley, Deputy CEO, who oversees the Advisory Board shared: "We've assembled a world-class group of independent advisors who offer a diverse and rich perspective to our senior management. The Advisory Board has helped us look at our current and prospective clients differently, resulting in more sustainable and balanced business prospects."

Although many companies keep information about their advisory boards' ROI private, our discussions with both large and smaller companies point to real and considerable financial returns. Larger corporations, with mature advisory groups, tell us that returns in the early stages range from $100 million to over $500 million.  For some smaller companies, advisory boards have accounted for higher valuations for spinoffs, avoiding poor decisions (unlike one company we know, without a board of advisors, that paid 60% more than it should have for an acquisition), and yes, many new clients, too.  Either way, when you add it all up, well-constituted and managed advisory boards can create significant returns.

Now, let's say you wanted to acquire such a board.  How would you approach it? The process may seem simple, yet it's anything but. As with any good business, clearly defined objectives are the keys to a successful advisory board and solid ROI. This includes identifying gaps in expertise, among many other things. Also, be bold: understand that those who you think are beyond your reach may be the best suited to test your capabilities and push you beyond your corporate comfort zone. You've also got to realize that greed is NOT good and that thinking only about your own bottom-line with your advisory board may make you very lonely and deeper in debt.

Recognizing what's in it for your advisor prospects will be one of the golden keys to soliciting their help. Done properly, your newfound advisors can open a five-lane freeway of relationships, insights, resources, and client opportunities. However, remember that you get what you pay for. You have to carefully sort out how your advisors will perceive your valuation of their time and efforts. Some companies have been lucky enough to find highly experienced and skilled advisors who are no longer financially motivated. For the most part, I believe this species has been over-hunted to the brink of extinction. Other "free" advisors may be secretly hoping to gain some other advantage from you down the line. I believe that appealing to someone's self-interest is a safer bet than relying on their generous nature. Either way, to align their interests more securely with your company's, your advisors should be compensated for their efforts through annual retainers, meeting fees, marketable equity, bonuses, commissions, in-kind services, or other creative incentives. Your recruitment process should include compensation negotiations, to increase your odds of success. Otherwise, your interests will most likely take a backseat to those of others who, they believe, value them more.

Once built, understand that constructive tension can be your best friend. You stand to gain a lot of good advice from each director one-on-one. However, getting them together periodically, accelerates the brainstorming and one-upping process among them, boosting your take-away potential. Being open to a push or a hard kick in the seat (no, I'm not into pain) from your advisors should enable you, and your management team, to drive business beyond where it's been. That's held true for small, mid-cap, and large global companies. The tough part is learning how to let go. Listen and debate the issues with an open mind, but once consensus is achieved, act on what your advisors recommend. If you don't, you'll lose their trust and interest, and your investment will likely go south. This is just the tip of the iceberg when it comes to building, running, and extracting value from a well oiled advisory board.

So what are you going to ask of your hard-won and newly-acquired set of (what you hope will be), precious expert advisors, the first time you sit down with them? That will depend on how you've assessed their personalities and egos, and on your own comfort and ability to balance subtlety with candor in what you say and do. But, even if you don't straight-out say it to them, then you should be thinking it - all the time: "show me the money!" A little jump up and down for emphasis (behind closed doors) won't hurt, either.

Now, once more, from the top: What's the purpose of a business and an advisory board?

BoardBench Companies, LLC | 5 River Road, Suite 245, Wilton, CT 06897USA | P. 203.493.0080

.

©2024 Board Bench.

developed by Turn Orange Ltd