The ABCs of forming an advisory board: some CEOs and company owners don't think they need any outside advice, but most do. An advisory board can make a business leader look very smart when used effectively.

• Author: Cagan, Dennis
• Position: ADVISORY BOARDS

TODAY'S BUSINESS CLIMATE is more challenging than at any time in history. One of the byproducts of the information revolution in general, and mobile communications and the Internet in particular, is the compression of time and the ubiquity of information. There is more competition in every field, both domestically and especially internationally. There are more regulations governing every aspect of industry, and in virtually every field there are multiple facets requiring increasingly specific experience and knowledge. The granularity of issues, business models, and management specialties is overwhelming.

As the owner or CEO of any company, private or public, whether you already have a board of directors or not, an advisory board is an increasingly popular option for getting in-depth advice from a number of experts. If you do not already have a board of directors, and are not quite ready to take that step, an advisory board is a worthwhile consideration. Advisors are specifically selected for their experience and skills as categorized by their knowledge of an industry vertical, their experience in a designated management discipline, or the economic sector they are from (e.g., government or education).

The three most common varieties of advisory boards are (a) those focused on prestige, (b) those providing deep technical knowledge to augment the company's staff and provide credibility, and (c) those primarily selected to provide business development opportunities.

The determination of whether to form an advisory board (and which kind to form) is very subjective. If your firm is not required to have a board of directors, you could opt to just have advisors. If you are required to have directors, you could also add an advisory board.

An important step is to be able to clearly articulate the charter, or role, of either board. Establish clear objectives, standards, goals and tasks for the members. An important consideration is the bandwidth required of management to organize and manage the advisors. They need frequent attention to update them on company activities and solicit their contributions. Another consideration is the resources to compensate them--fees and/or equity. Also, does your company have the personnel and infrastructure to follow through on whatever advice, guidance, or introductions an advisory board member provides?

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The key difference

Although the differences between advisors and directors may not always be understood by everyone, and their uses may often overlap, there are some very important differences. A board of directors, or board of managers for an LLC (limited liability corporation), is a legal requirement for most corporate structures in most states. They are usually required by the corporate charters. Their purpose is governance and the oversight of...