According to conventional business wisdom, behind every successful company is a successful board. But what makes a board successful? And how do you know which kind of board your company needs?

At Indian River Advisors, we know that if you pay attention to what drives value in your company, when you want to sell the company or enter into a similar corporate transaction you will be able to do so at the highest valuation. Boards are part of what drives value.

Does your company need a board of advisors or a board of directors or both? And what’s the difference? And why do boards matter?

A board of directors is built of people who are legally bound to the business. They have a potential liability associated with participating on the board – and therefore more skin in the game.  An advisory board, on the other hand, does not have that legal relationship with your company. As a result, a board of advisors is easier to assemble, comes with lower risk, and is a great way to support your business with a group of experienced people with skills or expertise that complement or augment your own or compensate for areas of weakness you and your team might have.

There is also a difference in the kind of guidance a board of directors offers as compared to a board of advisors. Directors help guide your company in a big picture kind of way, focusing on strategy and goals, while advisors can help with specific challenges or needs your company faces at a particular point in time. You might think of advisors as experts on individual issues with which you need help and guidance.

In a Forbes article about how to build better boards, Ryan Caldbeck highlights the fact that putting together a board – whether that board includes directors or advisors – is an opportunity. “It’s a rare chance to build a qualified pool of loyal mentors and colleagues who care that you succeed, in part because they will benefit from your success—either financially or in pride from their impact,” Caldbeck writes.

So what should you consider when building a board of advisors? Here are five suggestions for forming an effective team of advisors:

  1. Identify your needs: Where are your areas of expertise? What are your knowledge or experience gaps? Who do you know who possesses skills you don’t? Who do you trust?
  2. Dissent is good: There’s no point in filling an advisory board with yes-people. You don’t need someone who is going to agree with you all the time. You need people who will challenge you, who will think about a problem from a different direction, who will offer a different perspective. Why have a team of advisors if they’re just going to agree with everything you say? That just wastes everyone’s time.
  3. Use your connections: Build a list of people you admire, people who have skills you wish you had, people whose opinions you trust, and reach out to them. A phone call is usually the best first step, and if you don’t know the person you’d like to invite, but you know someone who does, ask for an introduction. This is an opportunity to expand your network, which will make your business stronger.
  4. Be a good host: It’s a good idea to host the first gathering of your advisory board in person. Treat your group to meals and lodging and cover travel expenses. Make the gathering a good use of everyone’s time. Have a clear agenda. Get things done. This is the start of a new and important relationship, and you want it to set the right tone.
  5. Have clear expectations: Make sure your advisors know what the role entails. How many meetings will you have? What are their responsibilities? How much of a time commitment does this work entail? And what do you need? Be clear about your expectations up front so everyone can be on the same page.

Building a board of directors entails a different set of priorities and goals. Remember, your board of directors has a legal relationship with the company – and they are also there to help you think about strategy and your company at a meta-level. With that in mind, here are five suggestions for building an effective board of directors:

  1. Think long-term: Garland McLellan calls this “using a crystal ball.” Your board of directors can help you take your business to the next level. As a result you want to recruit directors who can help direct the company you want in the future – not just the company you have now.
  2. Think diverse: As was the case in the board of advisors, you don’t want to fill your board of directors with yes-people. You want diversity – of opinion, of racial and ethnic identity, of gender, of perspective and experience. This will make your company stronger.
  3. Think dissent: According to the Harvard Business Review article about “what makes great boards great,” an essential part of an effective board (and therefore an effective and ethical company) is “the capacity to challenge one another’s assumptions and beliefs.” You want “bonds among board members that are strong enough to withstand clashing viewpoints and challenging questions.”
  4. Think strategy: Boards fall short when they don’t spend enough time on strategy, according to Dominic Barton and Mark Wiseman in the Harvard Business Review. So make time to pay attention to and improve strategy. There is also an increasing emphasis on inviting your board members to experience your business in action by spending some real time there and watching how things work.
  5. Think Independence: Advocates for good-all agree “that boards with too many insiders are less clean and less accountable.” So don’t just invite people you know or people you’re related to or people already on the inside of your company or industry. Invite people who are outsiders and who can be independent.

Are you interested in building a board of advisors or directors? Would you like to determine if the boards you already have are effective? Do you have more general questions about how to maximize enterprise value? Please contact Wes Teague at 703.628.4532 or email him at westeague@ir-advisors.com to set up a time to talk. Wes has over three decades of experience ranging from commercial and investment banking to senior corporate management. He has led numerous teams in pre-acquisition due diligence and post-acquisition integration. Wes brings to Indian River a focus on strategic initiatives designed to maximize growth and enhance owners’ value as a function of planning and execution. He looks forward to talking with you.