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How an Advisory Board Adds Value to Your Business
What is an advisory board? Ideally, it’s a collection of individuals who bring unique knowledge and skills to the table that complement the knowledge and skills of formal board members, resulting in a structure that more effectively governs an organization and supports the CEO.
Unlike a board of directors, an advisory board does not have the formal authority to govern an organization; that is, the advisory board cannot issue directives to the CEO. Rather, especially in a start up or small and medium enterprise (SME), the group serves as sounding board for the CEO, working as a set of trusted personal coaches and mentors to the CEO until he orshe is comfortable enough to reduce the group, and to rely more and more on senior executives and the board of directors.
When forming an advisory board, it is important to resist the temptation to stockpile “big names” for brand and recognition, if they don’t supply needed support and value to the CEO. First-time startup CEOs in particular want and need validation in their space, so they are more prone to lean on celebrity advisory members, but a smart CEO will release soon enough that it’s not worth releasing equity to retain a board of advisors if they are not adding tangible value.
It is recommended to start with a small advisory board with expertise that is crucially needed at the current junction, for example, retired CFOs to advise on business, legal and financial issues, retired or active business executives who can advise on organizational, legal, compensation, and leadership, or retired or active marketing executives, etc. Other advisors can always be added later on, as the CEO discovers more company needs.
Ideally, a good set of advisors should:
- Consist of recognized industry thought leaders who add immediate validation and credibility to the venture at a stage when there is typically none.
- Open doors, make introductions, and assist with crystallizing strategy and business guidance.
- Add value in making introductions to sources of capital, or serving as a due diligence reference during fundraising.
- Know people. The more third parties talking about your venture the better.
- Understand and work within the legal restrictions of company governance and board obligations, refraining from acting as a shadow board of directors.
- Participate with the CEO informally; this relationship is mostly not regulated by governing bodies and should be left to the CEO to initiate and manage.
- Be compensated in an appropriate way that doesn’t impact the equity or financial resources of the company, and is approved by the board of directors.
In the MENA region, it is particularly hard and not customary to assemble an advisory board for a startup or SME. There are numerous reasons for that: local culture and tradition, as SMEs have historically been opaque family businesses, an ecosystem that facilitates the process of matching CEOs with involved advisors, the dominance of more immediate issues of building a company including financing and survival, and the historical lack of available talented advisors in emerging sectors, namely technology.
Yet these guidelines offer a simple roadmap to get startups and small businesses started forming a board of advisors that can add substantial value to their vision.
Elie Habib is the Fund and Country Manager of RED (Riyada Enterprise Development, a division of Abraaj Capital) in Lebanon. He manages the Lebanon Growth Fund, which was established by Abraaj Capital, Cisco and the European Investment Bank (EIB) in December 2011 as a US$ 50 million fund for small and medium enterprises in Lebanon. The fund is industry agnostic and focuses on companies with significant growth potential, proven products and services, and those with the ability to expand regionally. Elie can be reached on Twitter at @ehabib and via email at elie.habib [AT] abraaj [DOT] com.
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