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Corporate advisory boards – try before you buy?

Appointing a corporate advisory board (CAB) offers companies an immediate injection of expertise and opens up a pool of future director talent. Here are some of the pros and cons.

Growth focused small to medium enterprises, as well as listed companies with specific skill requirements, are increasingly taking advantage of the benefits that a corporate advisory board can offer. A quick glance at some of the benefits include:

  • potential to test for future director talent pool  – opportunity for both sides to ‘try before you buy’;
  • immediate injection of expertise and source of strategic thinking;
  • can provide a springboard for growth by SMEs, or for specific transaction input (initial public offerings (IPOs), merger and acquisition (M&A) deals); and
  • lower risk (for both parties) than director appointment – advisory role without the decision-making responsibilities.

What is a Corporate Advisory Board?

A CAB is a standalone structure and is separate to the formally appointed Board of Directors. CABs generally provide an additional strategic resource to the incumbent directors and a sounding board for management. They focus on the strategic initiatives, organisational development and financial vision of the company.

Crucially, however, CABs are not decision-making bodies and ignoring this distinction can be perilous for both a company and its CAB members for the reasons detailed below.

Why ‘try before you buy’?

A CAB can be an ideal ground for future director talent to be tested in a low profile environment. Equally, CAB members can ensure the company is the right fit for them for a future potential directorship. There is no long-term commitment to retaining a CAB, or a particular member of a CAB, if there is no value being added. In effect, it allows both sides to ‘try before they buy’.

Advisory board members are not directors and do not therefore have corresponding statutory or fiduciary duties. Rather, a CAB acts as an independent source of information, ideas and resource for the company’s directors and executive with as general or specific a mandate as the company desires.

For example, a CAB may be appointed to generally assist in growth strategies, or to provide specific succession planning advice, or transaction input (e.g. around an IPO process or M&A deal). Some are appointed for specific knowledge, such as professional reputation, geographic knowledge or scientific skills.

Whilst a retainer of some sort is usually paid, this is typically nominal in comparison to the costs of a full-time directorship, which necessitates a broader and far more active role.

Other advantages

Some of the other advantages to establishing a CAB include:

  • obtaining an independent, fresh look (challenge the status quo);
  • easily appointed and removed;
  • role can be as specific or general as the company requires (under charter or terms of appointment);
  • access to enhanced skill sets, independent ideas, pragmatic advice (‘been there before’), expert qualifications or strategic thinking;
  • can be a vehicle for focused growth or transaction-readiness;
  • contact with expanded networks and associations;
  • expanded reputation and credibility in industry and investor/consumer market;
  • mechanism for director/executive succession planning;
  • lower cost than director appointment;
  • lower risk than full-time appointment;
  • lower profile in ‘testing’ phase – not disruptive; and
  • limited ‘control’ risk.

Increasing trend

The trend in establishing CABs is prevalent in companies of all shapes and sizes and across all industries. There has been a significant increase in appointments in the SME space, especially in engineering, manufacturing, transport, resources, retail, IT and life sciences industries. It is also a significant trend in the agribusiness space as rural family operations look to corporatise or make other succession plans.

Member appointments to CABs are reflective of the needs set out below, but may include experienced professionals such as lawyers or accountants, or specialists with relevant industry or commercial experience.

Appointing a corporate advisory board (CAB) offers companies an immediate injection of expertise and opens up a pool of future director talent. Here are some of the pros and cons.

When and who?

Prior to appointing a CAB, it is important for the company to determine its objectives. The key objectives will dictate when establishing a CAB will be most advantageous and determine the skill set of the candidates to appoint.

Advisory boards can be appointed for many reasons, ranging from macro broad organisational objectives to specific micro targeted aims. As such there is no right or wrong time to appoint a CAB. Some common examples of when organisations establish CABs include:

  • the transition from a private company to a public company or public unlisted to listed company –  i.e. a growth company entering the next phase;
  • a private or start-up company where a full board of directors is not necessary but outside advice is required;
  • additional expertise is an advantage – e.g. a scientific advisory board for a biotech company;
  • for a particular large transaction or venture – for input on strategy or building strategic partnerships;
  • where a company has a large number of stakeholders and requires broad advice;
  • as a succession plan for retiring directors; and
  • not-for-profit entities.

Advisory boards can also play an important role in the supervision of the good corporate governance of the company. In addition to considering what mix or specific expertise and experience is relevant and desired, other factors to take into account when selecting an advisory board member include:

  • independence;
  • cultural fit and value congruence with the organisation;
  • communication skills;
  • reputation in industry;
  • availability and time factors; and
  • working relationship with chief executive officer (CEO)/management.

A CAB can prove to be a tremendous resource for a company CEO, from which to draw advice and executive insight to implement and report to the Board. It is therefore important to carefully determine the size and membership of any CAB.

Practical aspects

There are legal, practical and risk issues to consider when establishing or accepting a position on a CAB. High on this list is retaining the benefit of the CAB members not being subject to the statutory, common law or fiduciary duties that bind directors of a company.

From a risk minimisation viewpoint, it is important to implement practical measures to help ensure that the CAB members are not deemed to be either de-facto or shadow directors of the company. The CAB’s role and mandate should be as defined, determined and documented as possible to clearly separate the functions of the CAB and the Board of Directors.

One way of doing this is to prepare a Corporate Advisory Board Charter which sets out the purpose, powers, composition, meeting and procedural requirements and prohibitions of the CAB. This may also be supported by specific terms of appointment for individual members, which are crafted to be consistent with the Charter.

Members of the CAB should not:

a)    vote on or purport to pass resolutions on behalf of the Board;

b)    hold themselves out to be directors of the company;

c)    be a signatory to any bank accounts of the company; or

d)    be appointed as a power of attorney for a company.

It is important to ensure that the CAB remains advisory only and that direct participation in decisions that affect a substantial part of a company’s business are avoided. Further, it is important that management not be seen to ‘act at the direction of’ the CAB.

In this regard, it will be crucial to ensure that the Board minutes are appropriately recorded, particularly if a CAB member is present as an ‘observer’. Separate CAB committee meetings should be held and accurately documented.

Conclusion

CABs represent a potentially valuable resource to drive growth and profitability. Properly structured, they represent a low-risk, low-cost proposition.

By observing these practical guidelines and carefully considering objectives and the composition of a CAB, companies can reap the benefits of readily available, independent and strategic advice while effectively testing potential future decision-makers. It is a ‘try before you buy’ option that will suit many organisations.

Reece Walker is Partner and Elissa Etheridge is a Lawyer at McCullough Robertson, a leading Australian independent law firm.

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