I’ve written before about whether you need an advisory board or not. As your company grows, there is actually a natural evolution in the kind of board your company needs. It’s been my experience observing thousands of companies that there are actually three levels of boards that exist-;each with different levels of responsibilities and obligations: Friends and Family, Advisory, and Fiduciary. Let me explain what I mean by each of these.
1. Friends and Family
In the beginning, when your company is still getting off the ground, you might form a very informal board made up of your friends and family members. You might also call this “kitchen cabinet” board since its typically a bunch of people who help you out occasionally over beers or dinner. No one is formally engaged, but they might be helpful in making connections, sharing advice, or for bouncing any ideas you might have off them. There are many family businesses that never progress past this point as they don’t want outsiders commenting on the family business.
2. Advisory Board
As your company grows, you might need more sophisticated advice, so many people form what it called an advisory board. This is more formal than your kitchen cabinet. While advisory board members don’t have any legal obligation or commitment to the company beyond giving you advice, they might be more senior or experienced people-;so you typically will pay them at least a nominal fee for their time. Or, you might host a board meeting at a good location to help reward them for their counsel. There is some strategy in terms of the kinds of people you want on your advisory board (another topic I have written about before). Think about industry experts, or people who know about processes you run inside your business, or perhaps even a financial expert. Warning: your accountant and lawyer don’t count. While they might be experts, their advice can be tainted because you have hired them to do a job for you. At this point, hired advisors of that type usually move to a consulting role.
3. Fiduciary Board
The more formal type of board is what’s called a fiduciary board, where board members have legal obligations to protect the interests of the company’s shareholders. With this extra level of commitment, and exposure, you need to pay your board members more than you would an advisory board. But you can also expect a much higher level of commitment and preparation in exchange on topics like talent, risk and strategy. Think of a big public company like Exxon; they would have a board just like this. Most entrepreneurs get scared off by the concept of the fiduciary board because they think it means they’ll lose control of their business. But as long as you maintain the controlling shares in the business, where you can veto any major decisions you don’t like, a more formal board like this composed of experts and senior leaders is actually a necessary step for any entrepreneur to free themselves up. And ultimately, if you sell some or all or our shares, this board will carry on overseeing the company. What you need to do is trust your board to help you and your management team grow the business-;that’s their job. They can help you grow as a leader and help elevate your game.
I remember a situation where I was involved with an entrepreneur who evolved his board exactly along these lines as he grew his company. At first, when the business was small, he had an informal board made up of friends and members of his CEO peer group. Then, a few years later, he formed an advisory board to up the level of the advice he was getting he upgraded the talent when he did this. Finally, he created a fiduciary board, upgrading the talent a second time -; which actually freed up his time because the board could work with his management team to run the business without him having to be involved every day. He could think and act more like an owner of the business, rather than an operator or executive.
In other words, finding the right board for your business can help elevate your role inside the business, from operator, to CEO, to owner. So if you want to have more time to think strategically about your business, and spend less time inside running it, finding the right board can be a way to reach that goal.