Entrepreneurs used to ask why they should bother with an advisory board or board of directors. Many regarded boards as just another layer of management and interference.
But the increasing recognition of the benefits of effective boards for good, affordable advice has gone a long way toward changing those perceptions. Now entrepreneurs are often focused on the best ways to establish a board and how to find qualified directors.
"Effective boards can bring huge benefits to SMEs [small and medium-sized enterprises]" says Donald Riendeau, co-owner of IVA Solutions & Conseils, a consultancy that specializes in corporate governance. "But for that to happen, you need the right people."
Mr. Riendeau has extensive experience with corporate boards and has overseen effectiveness audits on close to three dozen of them. During that time, he has developed strong ideas about how to best set them up at SMEs.
"You can't just cut and paste best practices from big businesses and apply them directly to SMEs," says Mr. Riendeau. "For example most SMEs start by first implementing informal advisory boards, as opposed to formal statutory boards similar to those which oversee public companies."
Staffing your board
According to Mr. Riendeau, SME advisory boards exist primarily to add value to the business. That means, ideally, they should be staffed to complement the abilities of the chief executive officer/entrepreneur who runs it. "Before seeking out potential candidates, we advise businesses to do a quick "SWOT" analysis, which highlights the company's strengths and weaknesses, as well as the opportunities and threats it faces. That makes it easier for companies to identify areas in which complementary skill sets are needed."
Trust is also a key factor, Mr. Riendeau says. "To provide valuable input, advisory board members need to know as much as possible about what is going on in the business."
"However as mostly private companies, there is a lot of information that SMEs do not make public, ranging from financial statements to corporate strategies. The more a CEO/owner trusts his advisory board members, the more open he is likely to be with them. They will thus be in a far better position to provide constructive advice."
"The ability of a potential board member to diplomatically challenge a CEO/owner's ideas and to help the company navigate though periods of growth and change is also highly prized," Mr. Riendeau says.
What's in it for the directors?
While listing the ideal qualities SMEs want in advisory board members is a good start, attracting qualified candidates is much harder, says another expert. "Small businesses don't generally have the same budgets to pay director fees that larger companies do," says John Grant, a long-time director on many boards and Executive in Residence, at the Institute of Corporate Directors Small and Medium Sized Enterprise program.
"As a result, companies are best off trying to recruit candidates who are not just in it for the money, but rather those with a genuine desire to see the owner do well."
Mr. Grant notes that family members often seem like perfect advisory board candidates, especially if they bring specialized skill sets to the table. But if a family member does join, board independence could be a casualty. This would however be less true if the advisory board member was from the CEO's extended family, such as a cousin, an in-law or an uncle.
Another excellent pool of potential SME advisory board candidates is the owner's often-extensive personal contacts.
Besides business networks, many of the places entrepreneurs go in their private lives such as golf and tennis clubs or their childrens' private school are frequented by the sort of high-calibre business executives, university professors or professionals, who would make ideal advisory board members.
And don't forget the growing numbers of retired business executives. Many remain vital and interested in business and are itching to make a contribution by attending advisory board meetings and offering their experience, wisdom and advice.
Formal boards of directors may be required
Charles Cazabon, vice president, venture capital at BDC, said the stakes rise considerably when businesses shift from using advisory boards to statutory boards. This usually occurs when businesses either transform into public companies, or they take on investors -- such as venture capital funds or private equity firms -- who want board representation to represent their interests.
"Members of statutory boards will generally have slightly different profiles than advisory board members," says Mr. Cazabon, who has had considerable experience with boards of directors during his extensive career. "You will generally favour someone with 'C' - level management experience. That means a chief executive officer, chief information officer, chief financial officer or someone with equivalent experience."
In addition, not all skills sets are easily recruited, Mr. Cazabon warns.
"Because of the influence that complex Sarbanes-Oxley corporate governance legislation guidelines have had on reporting standards, audit committee members are increasingly in demand."
Entrepreneurs faced with more stringent requirements for director qualifications and the potential for liability will normally need to follow a formal recruitment process and offer higher compensation.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.
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