Setting Up a Solid Board of Advisors vs Board of Directors

Which one: Board of Advisors vs Board of Directors? Both? Here's everything you need to know (and mistakes to avoid) to set up and run a successful board.

Board of Advisors vs Board of Directors – what is the difference and when does it make sense to have one, or both? And what can you do to get the most out of your board to grow your business? Or you may be asking “Do I need a board?” in the first place.

In this guide, I’ll dive deep into the answers to this important topic.

Board of Advisors vs Board of Directors: What’s the Difference?

board of directors Board of Advisors and Board of Directors are two important corporate functions that can help move your organization forward. As a CEO, how you manage your board will play a key role in your company’s success.

Board of advisors includes business professionals and experts from the industry who are hired to provide advice to the leadership team. On the other hand, Board of Directors consists of individuals, such as investors and executive officers, who have official fiduciary responsibility for making decisions, setting goals, and evaluating progress. Both these boards play a key role in achieving success for your organization.

Which Type of Board Do I Need And When?

You may be asking, “When does it make sense to have one type of board or both?” or “What roles does each board play?”

When it comes to boards with fiduciary responsibilities, many CEOs and business owners wrestle with the decision of whether they should have a Board of Advisors or a Board of Directors.

Board Structure and Purpose

A Board of Advisors typically consists of individuals who can provide guidance and advice without having legal decisions. A Board of Directors are more vested in the organization and may need to take on information-driven voting and critical decision making.

It makes sense to create both types of boards when your company is ready to raise capital or has complex decisions that require expertise or external oversight.

How to Select Board Members

board members CEOs typically have more control in selecting members for their Board of Advisors because some of the individuals on your Board of Directors might be appointed by your investors. That said, if you don’t have outside investment in your company, you can select the full slate of your Board of Directors, too.

Selecting board members is an important task as they oversee the activities of your company and can hold you, the CEO, accountable for reaching milestones. When making a decision it is essential to rely on research and analysis rather than preference or favoritism.

Essential traits of successful advisory board members include:

  • commitment to shared values
  • guidance regarding financial and legal matters
  • willingness to promote the organization’s interests.

However, there are also more intangible qualities to consider when choosing a suitable candidate.

It is important that they be able to get along with other board members and display timely communication skills, as well as cost-effective decision making abilities. More so, it is critical that potential new members display dedication to your mission. The last thing you want is a board member who doesn’t believe in your vision or goals.

3 Types of Board Members to Avoid

There are three types of Board of Director or Board of Advisor members that are not good fits for your board:

  1. Those who are too close to current employees (this reduces objectivity)
  2. Individuals who have investments or interests in competing companies (whose side will they be on?)
  3. People who have no time to participate in dialogs with you (what’s the point of an advisor who doesn’t show up for meetings?)

Look for potential board members who may have a unique skillset or expertise related to your organization’s mission and are not afraid to challenge the status quo. By taking all these considerations into account when assembling your board it will help ensure stability and longevity for your organization.

Do I Have to Give Board Members Equity?

stock investment for business Giving equity in the form of stock options or shares to board members is not required, but it is usually a good move – especially if your goal is to sell the business in a specific time frame. Here’s why:

Experienced board members who will add true value to your business are hard to find. That type of skill set usually requires a significant compensation package.

Board members and the CEO need to be aligned toward the common goal of increasing the value of your business. By providing stock options or equity through a vesting schedule, you give Board of Advisors or Board of Directors a clear path to participate financially in your growth.

For example, I personally serve on several company Board of Advisors. In return for my time, some compensate me by providing stock options, a few provide cash payments and others use a combination of both stock options and cash.

My Journey from CEO to Board Member →

I’m fairly selective about which companies I accept stock-only compensation from because the risk lies entirely on me. If the company does not have a successful exit, then I have lost the time I put into help them grow.

This is one of the reasons that offering your Board of Advisors or Board of Directors a combination of stock and cash for their time makes a lot of sense for non-lifestyle businesses. You will be able to attract skilled experts to help you grow fast.

Stock Option Vesting Example for Board Member

Vesting stock options for Board of Advisor or Board of Director means that they earn shares based on the duration they work with you. Common vesting schedules are four years with a one-year cliff.

This means that if you offer 1000 stock options to the board member, they will get 250, or 25%, upon completing one year of services. After that first year, they will accrue 21 shares per month (the remaining 750 shares divided by the remaining 36 months of vesting) thereafter until they earn all 1000.

Who Should Get Equity

While it is more common to offer stock options to Board of Director members due to their fiduciary role in your business, consider using options for your Board of Advisors. It enables you to attract a caliber of seasoned individuals that you might not otherwise have access to.

If your goal is to eventually sell your business within, say 10 years, giving equity makes sense to motivate board members and align their interests with that of your company. Many companies offer a mix of both equity and cash to reward board members for their guidance.

However, if your company is designed to be a lifestyle business, then offering non-equity compensation such as cash may be the best bet for you. Many successful business owners prefer running a lifestyle company and do not gran stock options to advisory board members or their Board of Directors.

This way, you avoid diluting your shares in the event you plan to hold onto your business for a long time. It is also useful if you intend to rotate your board members after they serve a set term of years.

Ultimately, it’s essential to evaluate the particular needs of your organization when making this decision, as there’s no single right answer. Consider research in your industry or discuss options with other advisors who may have experience in a similar situation.

Taking the necessary time to reflect on how you respond can result in rewarding long-term relationships between you and those advising your company.

How Boards Add Value

board of advisors When putting either board together, it is wise to choose members from diverse backgrounds who bring complimentary backgrounds and experiences.

A Board of Advisors can help strengthen corporate culture, set strategies, and develop contacts into new industries. The Board of Advisors typically provides insight from outside. They are often industry experts who have skills in marketing, operations, sales, finance, and other areas where the CEO may need guidance.

On the other hand, a Board of Directors provides protection for shareholders by creating checks and balances within your company through their regulatory roles, typically mandated by state law. The Board of Directors is for internal governance with members appointed internally who are personally responsible for decision-making within an organization’s structure. They can also be from an investor or venture capital group who requires a board seat as part of their investment in your company.

An important note: a Board of Directors usually has the authority to fire the CEO. You may have heard of the infamous case where the board of Apple fired Steve Jobs, only to bring him back years later. This is why interacting with your board is critical in your success. We’ll share specific tips on this later in the guide.

When considering which route is best for your company or organization, it is important to consider exactly what type of guidance you need in order to be successful.

Many companies choose to create both a Board of Advisors and a Board of Directors. Ultimately, each type of board can serve as an invaluable resource for entrepreneurs but it’s important to choose wisely when deciding which one will be best for their individual situation.

How Often CEOs Should Communicate With Board Members

As the CEO of any organization it is important to ensure open and regular communication with board members. This can help to develop relationships and promote transparency, furthering the success of your business.

  • Communication to your Board of Advisors vs. Board of Directors might be slightly different for each group. It should not just be limited to updates on company performance but should also be used as a tool to solicit feedback and advice from more experienced professionals.
  • While there is no one-size-fits-all approach to meeting frequency, it is a good practice to do check-ins in-person or over video calls at least once a quarter with your Board of Directors.
  • Many companies send weekly or bi-weekly email updates to their advisory board members to keep them abreast of progress and challenges. This can spark an idea for a board member to make a connection to someone in their network, share detail thoughts before the CEO implements a new tactic, or provide other guidance in between formal board meetings.

These kinds of sessions provide the perfect opportunity for CEOs to share all of their successes with their board. More importantly, they can highlight any issues or financial concerns so that corrective measures can be taken swiftly. Having regular conversations will help build trust between both sides and ensure all parties involved stay on the same page.

Common Challenges CEOs Encounter With Board Members

manage stress in small business As a former 3-time Chief Executive Officer, the biggest challenge I encountered with my Board of Advisors and Board of Directors was managing conflicting priorities between board members and my executive team.

Board members often have diverging ideas on strategic initiatives, which can lead to heated conversations and disagreements among the group. This can be especially difficult when it comes time to make critical decisions that could mean substantial consequences for the company’s future.

When people have differing opinions about goals and corporate direction, which becomes more prevalent during hard times, your role is to manage expectations and conflict.

You may have board members jockeying for political positioning within your group. Some may have overwhelming personalities that demand more attention and others could have a personal agenda that drives their expectations of you and the company. The different opinions among advisory board members may lead to conflicts in priorities that halt any efforts towards achieving your objectives.

Feeling Small After a Board Meeting? That’s Normal

Even though some board members may not agree on strategy, it is possible to find solutions when you keep open dialog and respectful debates as a core principal for your meetings.

I recall many board meetings when I finished the day feeling very small.

I knew that my board’s intention was to offer the best advice to take the company forward. But oftentimes it feels personal when their commentary goes against many of the activities you prioritize.

Your job is to pick yourself back up and find the path forward. Make detailed notes of what the board identified as holes in your plan so that you can work with your teams to make positive strides before your next board meeting.

If you have a board member who is constantly making noise just because they like hearing themselves talk, you may need to find a way to get that person off of your board. This is easier done in a Board of Advisors.

For companies with outside investments, removing someone from your Board of Directors is very difficult. You should consult with your attorney and other advisors, perhaps even other trusted board members, on your options.

Systems To Hold Your Board Accountable

advisory board meeting Just as your board holds you, the CEO, accountable, you may also want to hold your board accountable for their role in your company’s success.

Communication and transparency with stakeholders is the best way to ensure accountability. Make sure your board knows its responsibilities and has clear expectations for how it operates. Have regular meetings with your Board of Advisors, collectively and individually, that allow everyone’s voice to be heard.

Use group time to suggest ways in which the team can work better together. Regularly review decision-making processes and elect new members as you need to keep everyone engaged with your team’s mission.

Active accountability systems give board members a consistent feedback loop that informs their work, engages their critical thinking, and puts them in sync with organizational goals.

Systems include:

  • attending meetings
  • participating in constructive conversations
  • making connections to their network
  • self-evaluations and disclosures
  • if your organization is large enough, participating in committees focused on specific topics.

Having systems to monitor board progress encourages trustworthiness between the board members, executives, and other internal stakeholders.

It’s good practice to periodically review board performance collectively and individually through reports that assess each member’s progress on objectives.

This periodic reviewing serves as an opportunity for you to ensure that everyone is meeting standards and to recognize individual accomplishments. It also gives members a chance to voice concerns or grievances they may have with their workload or the organization’s direction.

As the leader, you have to be able to trust that all members of your Board of Advisors and Board of Directors are working together towards achieving the same goals. You will create an atmosphere where board members are responsible for their actions, hold each other accountable for progress, and strive for successes aligned with the shared goal of the team.

 


Raj Khera - bio Author: Raj Khera is an Executive Business Coach, a former 3x CEO, and publisher of MoreBusiness.com

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