Undoubtedly, advisory boards are controversial. Advisory committees are contentious. While some articles praise them, others dismiss them as merely a way to show off in pitch decks. Truthfully, advisory boards don’t always work. They can still be very powerful and provide a high ROI if they are used properly.
This article provides an overview of the advisory board, its economics, how and when it should be used, and a guide on how to build one.
What is a Advisory Board?
At their most basic, advisory boards consist of groups of experts in a particular field. An advisory board’s role is to guide a company’s leadership on issues such as company vision, innovation, and risk management. does not have the authority to vote in corporate moeurs, even though they advise management.
The Business Development Bank of Canada surveyed over 1,000 small- and medium-sized businesses (SMEs) in order to find out how many of them have an advisory board. 80% of respondents said they would set one up again. BDC conducted a 10-year study between 2001 and 2011, which found that the annual sales of businesses that had advisory boards (307 observations) were 24 percent higher than those in the control group. The productivity of those who had advisory boards was 18% higher. BDC encourages all of its clients, 49,000 in number, to use advisory boards. About 10% do.
A Wall Street Journal article states that 50 Fortune 500 companies, such as General Electric, American Express, and Target, have created digital advisory boards. These are typically composed of six experts younger than 50 years old. These groups provide management with guidance on a wide range of topics, from emerging digital trends to new marketing tools. Since 2011, GE’s Digital Advisory Group has met quarterly. Members are rotated annually. Experts from gaming and data visualization have been invited to the group. The GE Sound Pack app, which helps electronic musicians create tracks, was born out of these meetings after a 26-year-old member of the advisory board suggested it. GE’s advisory board was also useful on the 45th anniversary, helping GE to promote its role, which was to manufacture the silicon rubber used in the astronaut’s moon boots. GE, with the help of its digital advisory board, produced “moon boots” sneakers that cost $200 each and were sold out in minutes.
General Electric Board of Directors vs. Advisory Board
The two are often mistaken for one another. The key difference is fiduciary duties. This is the legal obligation to act in stakeholders’ best interests via a construct specific duty. Advisory board members deconstruct particular responsibilities as the BOD to influence corporate management. Fiduciary obligations are not as strict when it comes to providing strategic insight into business growth. High-profile individuals will typically accept an advisory role over a directorship because they don’t have to worry about legal liability.
A BOD can exist in perpetuity, while an advisory board has a defined lifecycle. The lifespan of an advisory board can be determined, but it is not always continuous. According to Owen Jonathan, an executive board director of PwC UK’s advisory board, the term “board” is misleading. They don’t have the same level of formality as a board. The advisory board and board of directors are separate, but parallel bodies.
Economics of an Advisory Board
Compensation is one of the most heated debates surrounding advisory boards. Professional advisors often suggest meeting stipends of thousands and equity upside. However, retirees and entrepreneurs who want to “pay it back” insist that a simple cup of coffee will suffice. The truth is somewhere in between.
I think the company should provide at least something, whether it is paying for meals or travel, offering an honorarium or equity. I encourage startups pay between $100 and $500 per meeting. They can also host a meal or cover incidental expenses. In large corporations, the compensation paid annually to advisory board members ranges between a third to half of that paid to regular directors.
In the BDC survey, 57% of members of advisory boards were not compensated. Pierre Cleroux (VP of Research and Chief Economist at BDC) told me that the majority of advisors in Canada are simply there to help small businesses succeed and do not see it as a way to enrich themselves. We also talked about the stark difference between US and Canadian startups’ willingness to give equity to advisors. Cleroux said, “We found that Canadian entrepreneurs are very reluctant to share equity. Canadian entrepreneurs typically save equity for financing, and they want to control their businesses.
The size of the board is another cost consideration. A University of Pennsylvania study concluded, however, that after six people the level of collaboration drops. According to this research, the BDC Study revealed that the average size of advisory boards was five.
A Quick Look at Equity
has been extensively debating equity. Equity makes no sense for an established company since they are able to pay in cash. A startup might be tempted by the chance to gain access to high-profile advisors in exchange for a few percentages. Here, founders need to tread carefully. It may be a warning when an advisor demands a substantial stipend or equity upfront. Equity incentives are expensive and can reflect badly on the founder if the advisor provides little or no value. When it comes to equity, I suggest that the relationship between advisor and founder start in a honeymoon period, where equity is only available after the advisor provides tangible value.
A tech founder hurriedly drafted an email offering what appeared to be 20% equity. The advisor agreed quickly to these terms because they seemed generous. When it came time to finalize the deal, there were some issues. The founder offered 20% of the option pool. (20% of 10% would be 2% of all shares). The advisor, on the other hand, was expecting to receive 20% of the company. I was able to facilitate a solution when I demonstrated that the advisor’s request for 20% of the entire company was way above the benchmark terms. This amount would negatively affect the company’s ability to raise capital.
Return on Investment (ROI) Framework
Note that a board of advisors is not always the best way to get advice (cost-wise and otherwise). Alternatives to an advisory board include current employees, newly hired staff, and third-party service providers. The members of the advisory committee should have an x-factor, like a valuable network or extensive experience.
It’s hard to find representative statistics. While there are anecdotal examples of ROI for advisory boards (showing returns of more than $100 million for large corporations to higher evaluations in startups), it isn’t easy to pinpoint representative statistics. We can, however, borrow from ROI Frameworks that are used by companies that consider customer advisory boards in order to engage current and potential customers. Analyzing ROI for advisory board projects should be done the same way as any other corporate finance project. Consider the costs, the potential returns, and how you will weigh the return versus other investment options.
