Many of our clients are individuals who built a company from the ground up or acquired a business at an early stage in its development. In both cases, as successful organizations grow over time, they usually transition from individual governance to institutional governance.
Highly successful small businesses often make this transition by first putting in place a Board of Advisors. By creating an advisory board and choosing members with experience in governance of larger companies, the small privately owned company is able to learn over time how to be led by a management team or a board, as opposed to being led by an individual.
A Board of Advisors is not to be confused with a Board of Directors. Directors have legally defined governance responsibilities that are established by the corporation’s bylaws. Because their fiduciary duty to the company can make Directors personally liable for risks of the business, Board Directors expect significant compensation, usually including both cash and equity, and they insist on Directors and Officers liability insurance, which is a substantial expense to the business.
An advisory board, on the other hand, is an informal group of experts and advisors who give advice to the business but have no legal authority and no fiduciary duties to the company. They can conduct meetings like a senior executive staff or board of directors, but they technically have no authority. Advisory boards can be created and disbanded easily, at the discretion of the owner. Because they have no formal legal liability, Advisors’ compensation expectations are much lower, usually consisting of smaller equity participation (such as stock appreciation rights) and modest cash fees. Advisory board members seldom demand Directors & Officers insurance.
The existence of a Board of Advisors can increase the value of a business in the eyes of potential acquirers by showing that the business is well along its journey to institutional governance, which makes post-acquisition integration less risky for the buyer.
For these reasons, we recommend private owners of aerospace and defense companies give serious consideration to forming a Board of Advisors well ahead of a potential sale.
Have a great day everyone.