Companies are like living organisms – they require constant care, attention, and guidance to thrive. Every CEO understands this, but few have the time or expertise to manage every aspect of their businesses. This is where advisors and advisory boards can step in to provide the necessary guidance and expertise for organizations to thrive.

An advisory board is a group of experienced business leaders who provide strategic advice and guidance to a company’s management team. Advisors are not involved in day-to-day operations or decision-making. Instead, they offer insights and recommendations on key issues such as market strategy, finance, and human resources. They serve as a sounding board for the CEO and other key executives, offering objective feedback and suggestions that can help the company overcome challenges, seize opportunities, and achieve its goals.

Advisory boards differ from boards of directors in that they do not owe a fiduciary responsibility to the company, and there is no lawful risk to executives to ignore the advice of advisors. The board of directors has legal responsibilities to the company and broadly oversees management decision-making on behalf of shareholders, whereas advisers and advisory boards offer actionable advice and support to the CEO and management team.

I have served on numerous boards throughout my career. I have seen firsthand the benefits that advisors can provide to companies, particularly those that are growing quickly, entering new markets, raising capital or undergoing significant changes. By bringing in outside perspectives, advisory boards can help companies avoid blind spots, identify opportunities, navigate challenges and provide additional confidence to shareholders. An advisory board is also a smart way to access advanced skill sets or experience without having to hire new employees, and just as easily terminate the advisor when that insight or expertise is no longer required.

This article is aimed at CEOs and business leaders who are looking for ways to grow their businesses faster and better. It provides insights and tips on how to establish and work effectively with advisory boards, and how to find and compensate advisors. These recommendations are geared towards businesses of all sizes but are particularly relevant for startups and small businesses that may lack the resources or experience to manage key challenges and decisions on their own.

Why Companies Need Advisory Boards
Numerous studies and research reports have demonstrated that companies with advisory boards are better run, grow faster and are more profitable than those without them. According to a study by the National Association of Corporate Directors, 48% of companies with advisory boards experienced increased revenue growth, compared to 35% of companies without advisory boards. Another study by the Harvard Business Review found that companies with advisory boards had higher valuations, greater market share, better financial performance and higher levels of innovation.

If that’s not reason enough, according to a report by the consultancy firm EY, 73% of private equity firms believe that advisory boards add significant value to portfolio companies. The report also found that companies with advisory boards are more likely to have successful exits than those without advisory boards. A study by the consultancy firm PwC found that companies with advisory boards are more likely to achieve sustainable growth and higher shareholder returns. Specifically, companies with advisory boards achieved an average compound annual growth rate (CAGR) of 5.6% over a five-year period, compared to 2.3% for companies without advisory boards. These companies also delivered higher shareholder returns, with an average total shareholder return (TSR) of 19.2%, compared to 15.6% for companies without advisory boards.

The benefits of advisory boards are numerous and far-reaching. Here are ten reasons why your business may need one:

1. Importance of outside perspective: When you’re running a business, it’s easy to get tunnel vision and miss important trends or opportunities. Advisors offer an external perspective and bring fresh ideas and insights to the table. They can help you see your blind spots and identify areas for improvement.
2. Access to specialized knowledge and experience: Advisors bring expertise and experience in specific areas, such as marketing, finance, technology or operations. By tapping into this knowledge, businesses can make better-informed decisions and avoid costly mistakes.
3. Accountability and support for key decisions: Running a business can be lonely and stressful. Advisors offer reasoning for important decisions and provide support and guidance when you need it most. Just talking through a key business challenge with a thoughtful and trusted advisor may provide the necessary clarity to overcome obstacles to reach decisions and achieve goals faster.
4. Coaching and improvement: Advisors can coach, guide and introduce management to new skills, particularly when launching new programs or products or entering into new markets. Advisors may also act as confidants for all manner of issues that may at times overwhelm a CEO.
5. Integration after mergers or acquisitions: Advisors can provide that “bird’s eye view” that can be crucial to the thoughtful and efficient integration of business units.
6. Team and spending effectiveness: Advisors can use their specialty knowledge and experience to evaluate the effectiveness and efficiency of departments and teams or provide a sanity check to spending in areas like advertising and marketing.
7. Mitigation of risks and challenges: By identifying potential risks and challenges, advisors can help businesses avoid pitfalls and navigate difficult situations. This is particularly valuable for startups and small businesses, which may lack the resources or experience to manage these issues on their own. According to a study by the National Bureau of Economic Research, companies with advisory boards are more likely to survive in times of economic downturn or financial crisis.
8. Assistance with raising capital: Experienced advisors can help businesses articulate their investment proposition and build investor decks that resonate with investors. They can also leverage their networks to connect businesses with potential investors or partners. According to a report by Ernst & Young, companies that use advisors to help raise capital achieve significantly higher valuations and receive larger investments than those that do not. The report found that companies with advisors received an average investment of $10.6 million, compared to an average investment of $5.6 million for those without advisors, with an average valuation of $117.9 million, compared to an average valuation of $62.3 million for those without advisors. Another study by the National Bureau of Economic Research found that companies that used advisors during fundraising rounds had a higher likelihood of success and received an average investment that was 28% larger than companies that did not use advisors.
9. Add diversity to executive decision-making: A survey by the consultancy firm McKinsey & Company found that companies with diverse advisory boards are more likely to achieve above-average financial performance. Specifically, companies with gender-diverse boards reported a 21% higher likelihood of outperforming their industry peers on profitability, while companies with ethnically diverse boards reported a 33% higher likelihood of outperforming their peers on profitability. (Source: McKinsey & Company, 2020)
10. Executives as understudies: Great advisors will quickly become intimate with the innerworkings of the company and valuable members of the team. It is not uncommon for advisors to be asked to step into executive roles, temporarily or permanently, as companies enter new markets, add product lines, acquire businesses, etc.

Many of the world’s most admired businesses use advisory boards to help guide their strategic decisions and provide expert insights. Here are a few examples of companies that use advisory boards:
• Facebook: Facebook has an advisory board consisting of academics and experts from various fields, who provide guidance and feedback on the company’s policies related to content moderation and privacy.
• Airbnb: Airbnb has an advisory board made up of hospitality industry leaders who advise the company on issues related to hospitality, travel, and tourism.
• Goldman Sachs: Goldman Sachs has an advisory board consisting of former CEOs and government officials, who provide the company with advice on economic and political issues.
• Starbucks: Starbucks has an advisory board made up of business and social impact leaders, who advise the company on issues related to social responsibility, sustainability, and community engagement.
• Microsoft: Microsoft has an advisory board made up of business leaders, academics, and policymakers, who provide the company with advice on issues related to technology and innovation.

How to Work with an Advisor and What to Expect
Once you’ve engaged one or more advisors and/or established an advisory board, the next step is to make sure you’re working effectively with your advisors. Here are a few tips to keep in mind:

1. Establish clear goals and expectations: Before you start working with an advisor, make sure you’re clear on what you hope to achieve together. This may include deliverables such as business plans, go-to-market strategies, pricing modeling, marketing tactics, etc. Define what success looks like. This may be tied to milestones for revenue growth, customer satisfaction, or fundraising success.
2. Identify areas where the advisor can add the most value: Advisors bring a wealth of knowledge and experience, but it’s important to focus their efforts on the areas where they can make the biggest impact.
3. Establish communication protocols and meeting frequency: Determine the most effective way to communicate with your advisor, whether it’s through regular one-on-one meetings or larger advisory board meetings. Make sure to establish clear expectations around meeting frequency, agendas, and follow-up actions.
4. Provide access to company information and resources: Advisors need access to key information and resources to be effective. Make sure they have the necessary tools, such as financial reports or market research, to provide valuable insights.
5. Adjust goals and expectations as needed: Your business needs and priorities may change over time, so it’s important to periodically reassess your goals and expectations for your advisory board.
6. Leverage the advisor’s network and connections: Advisors often have valuable networks and connections that can benefit your business, including potential customers, suppliers, distributors, partners and investors. Tap into these resources as appropriate to help drive growth and success.
7. Balance input from advisors with internal decision-making processes: Advisory boards offer valuable input and guidance, but it’s important to strike a balance between their advice and your own internal decision-making processes. Ultimately, you are responsible for your business’s success.
8. Build trust and rapport: Like any business relationship, building trust and rapport with your advisor is crucial. Be transparent, responsive, and respectful, and encourage open and honest communication.
9. Be mindful of their time and purview: Advisors are not employees and should not be expected to regularly exceed the amount of their time agreed, nor expected them to assume responsibilities that belong to management, without mutual agreement or further compensation.

How to Find an Advisor or Build an Advisory Board
Finding the right advisor can be challenging, but there are several strategies you can use. Here are a few tips:
• Networking and leveraging professional associations: Reach out to colleagues, mentors, and professional associations to identify potential advisors. Attend industry events or conferences to expand your network.
• Utilizing search firms or consulting firms: Consider hiring a search firm or consulting firm to help identify potential advisors with the right expertise and experience.
• Specialized board recruitment services: Board Owl, for example, is a specialized board recruitment service that matches businesses with qualified advisors based on their specific needs and goals.
• Board Associations: Virtual Advisory Board (VAB), for example, helps businesspeople build their networks and become highly capable directors and advisors, providing companies with a large pool of perspective advisors.
• Hire an advisor to build the advisory board: often the first advisor you recruit is one that can help you attract other advisers and structure the advisory board.

How to Compensate Advisors
Compensation structures for advisors can vary widely, and there’s no one-size-fits-all approach. Here are a few considerations to keep in mind:
• Define compensation structures based on the advisor’s contribution: The amount and type of compensation should be proportional to the advisor’s level of contribution and the value they provide to your business.
• Options for compensation: Consider offering cash compensation, equity, or a combination of both. The type of compensation may depend on the advisor’s level of involvement, the stage of your business, or other factors.
• Range of compensation and considerations for setting compensation levels: The range of compensation for advisors can vary widely, depending on factors such as the size of the business, the level of involvement required, and the advisor’s expertise and experience. According to a report by AdvisoryCloud, the average hourly rate for advisors is $300-$500, while equity compensation ranges from 0.25%-2.5%. It’s important to do your research and understand the market rate for advisors with similar expertise and experience.

Advisors and advisory boards offer a valuable resource for businesses looking to grow faster and better. They bring specialized knowledge, outside perspective, and accountability to key decisions, and help mitigate risks and challenges.

Working effectively with an advisor requires clear goals and expectations, open communication, and a willingness to address conflicts or issues as they arise. Measuring results and getting the most from your advisory board requires defining measurable objectives, evaluating progress and effectiveness, and leveraging your advisor’s networks and connections.

Finding the right advisor can be challenging, but there are several strategies you can use, including networking, leveraging professional associations, utilizing search firms or consulting firms, and specialized board recruitment services like Board Owl or associations like Virtual Advisory Board (VAB).

Compensation structures for advisors can vary widely, but it’s important to define compensation based on the advisor’s contribution, consider a range of compensation options, and do your research to set fair and competitive compensation levels.

If you’re a CEO looking to grow your business faster and better, consider hiring and advisor and/or establishing an advisory board. The benefits are clear, and with the right approach, you can build a valuable and effective partnership that helps your business thrive.

For more about structuring boards, see: Getting Marketing on Board.

Sources:

1. National Association of Corporate Directors study: https://www.nacdonline.org/insights/publications.cfm?ItemNumber=16011&navItemNumber=4987
2. Harvard Business Review article: https://hbr.org/2014/07/why-your-board-needs-an-advisory-panel
3. EY report: https://www.ey.com/en_gl/growth/private-equity-divestments
4. PwC study: https://www.pwc.com/gx/en/services/audit-assurance/publications/why-every-private-company-needs-a-board-and-how-to-build-one.html
5. National Bureau of Economic Research study: https://www.nber.org/papers/w19001
6. Ernst & Young report: https://www.ey.com/en_us/growth/how-advisors-help-companies-raise-capital
7. McKinsey & Company report: https://www.mckinsey.com/business-functions/organization/our-insights/diversity-wins-how-inclusion-matters