Get on Board

The Importance of Advisors in Privately Held Organizations

By Fred Treuhaft & Cathleen Hare

Business Planning

Universal Advisor, 2005 Issue No. 1

Sarbanes-Oxley expanded the role of publicly held companies’ boards of directors, stressing that they be independent of management and have significant authority to function effectively and objectively in their oversight role as the elected representatives of stockholders. While privately held companies are not specifically bound by the same rules, there are a variety of benefits that an advisory board can, when selected properly, provide to a privately held enterprise.

Potential Obstacles

Some organizations resist the notion of employing advisors from outside the company. Family businesses are particularly guilty, as nearly 1/3 of them prefer to keep all decisions within the family. Why are some organizations so resistant?

To begin, privacy is a major concern. Many business owners balk at the notion of allowing others access to the inner workings of their businesses — an understandable objection. But it’s not as though a business will select its advisors from the yellow pages; selecting a board of advisors is a deliberate process by which only the most qualified and trustworthy candidates are selected. The benefits are worth the risk.

In addition, some organizations fear that consulting with an advisory board could raise a lot of additional issues that management doesn’t have the time to address — similar to opening Pandora’s box. Maybe, but chances are those questions need to be raised, and addressing them sooner rather than later is always advisable.

Time is also a factor; management is busy and may not feel the investment of time is appropriate or necessary; however, isn’t it always worthwhile to invest in the business? Adding an advisory board structure and committing the requisite time will pay dividends in the long run.

Finally, oftentimes management believes it can solve any problem itself. Many business owners are used to being in charge and having people look to them for answers — not the other way around. And while self-reliance may be a positive trait in certain situations, it can be an obstacle in others. Outside advisors can keep management from reinventing the wheel and sometimes stop problems from mushrooming into crises.

The Benefits of an Advisory Board

A carefully selected advisory board affords privately held organizations a number of benefits. It offers independent, objective input on business issues and decisions. It offers additional skills or experience that may not be present in the management team, as well as expertise in important technical disciplines. It can offer strategic connections to other organizations. Finally, it affords management a rare pause in the day-to-day activities of the business to reflect on company accomplishments and direction as compared to the strategic vision. Has the company achieved its goals? What could be done differently?

When Selecting Your Board…

So what kinds of professionals should comprise your board? Should they be lawyers, bankers, and accountants? Maybe in certain situations but, more often than not, they’re people with similar industry expertise who understand your specific issues and can offer a unique and experience-rich point of view. Oftentimes including a CEO or COO of a larger company — maybe a public company — in the same or similar industry can be beneficial. If an organization is thinking of going global, it makes sense to approach candidates who have international experience. Family businesses may benefit by including both first and second generation managers from other family businesses to help ease family dynamics. It all depends on a company’s objectives.

Once a company has determined what it’s looking for, it’s time to begin searching for potential candidates. When evaluating these candidates, consider the following questions:

• Are you comfortable with the person — can you be open and honest with him/her? Do you trust the person?

• Does the candidate get along with your management team or children as well as you?

• Is the candidate at least as successful in his/her field as you are in yours?

• Would you be proud to be associated with this person before customers, suppliers, and other important contacts?

• Does the candidate have enthusiastic references from businesses similar to yours? Have the references given permission to be used?

• Is the candidate well-suited for the role you need him/her to play?

• Does the candidate challenge you and sometimes cause you to see things in a different way?

Get On Board

While Sarbanes-Oxley does not hold privately held organizations to the same standards as publicly held ones, the importance of an advisory board cannot be overstated. A carefully chosen board will provide independent, objective input on business issues and decisions, as well as additional skills or expertise beyond the scope of management. They say two heads are better than one…think how much better four or five could be.