Why Projects RH?

Some readers may ask “why does Projects RH have a view on this topic or experience in this area?”

Most founders and business owners are happy with how they run “their” businesses. The need for a change in how the business is run generally comes from either the decision we need other people’s money to expand the business or as part of succession planning. It is human nature that we do not want to give away control and believe that our existing advisers who have served us well for many years can continue to do so into the future. Organisations that come to Projects RH are looking to change their business model whether that’s expansion or selling. As such, they are generally willing to listen to what we have to say. Talking about boards and advisory boards is never an easy topic, but it is necessary.

Background

In some senses being a board member, being a member of a board committee and being a member of an advisory board are very similar yet in other ways they are like chalk and cheese.

Board members have very clear corporate governance and now personal legal liability for the decisions of the companies of which they are directors. This role is owner’s and comes with legal responsibilities. Board members have their duties defined by statute, the company’s bylaws and announcements as the role and responsibility of directors made in company statements. By way of contrast being appointed to a board committee as an external member has a lot less responsibility.

Whilst at the other extreme, advisory board members are there to provide advice on matters referred to them. Board members need to ensure the minutes of their meetings meet the required standards. This generally includes matters discussed and views expressed.

Modern Boards and advisory boards

If we exclude the top 500 companies listed on the ASX (Australian Stock Exchange) and the subsidiaries of global multinationals, many companies do not have access to the pools of expertise that they need from time to time. The general model for a medium-size company is to have which a board is relatively small with representatives from the management and the major shareholders.

As these businesses grow, they look for external directors which represent areas of expertise they need at the board level, generally:

• someone experienced it in the industry – to mentor the CEO
• someone who understands corporate governance – to work with the Company Secretary
• someone to oversee compliance and reporting – usually to chair the Audit Committee

The Advisory Board

Many organisations, including companies, want to appoint panels or individuals, who can be a mix of staff, board members and outsiders to deliberate and advise on specific matters. Generally, this occurs in in areas where the company does not have internal expertise. Many not-for-profit’s have finance committees to oversee the work of small finance team, generally seen as a service group, with a balance of the management group are focused on the purpose of the entity. Many schools also have finance committees of qualified and interested community members who give freely of their time to assist the organisation and effectively relieve the principle of monitoring the finances of the school.

Members of an advisory board provide non-binding strategic advice to the management of a company or other organisation. The informal nature of this role means that they can have a more collaborative approach and they must accept that their advice may not be followed. The minutes of advisory boards or the opinions of an individual advisory board member tend to be less specific and may or may not include a recommendation.

In practice, an individual advisory board member may meet with the CEO or another executive to discuss matters pertinent to their area of expertise. This area of expertise is generally why an advisory board member is appointed. As such an advisory board member can act as a mentor, coach or adviser depending on the individual’s needs in the case at hand. Quite often CEO will want an advisory board member is someone to talk to particularly if they don’t have subject matter expertise. I have worked with a technically based CEO who wanted to talk to someone about the advice he was receiving from his CFO, the auditors and his banks, simply because he wanted an independent person to talk to him about what they were saying. This person was not silly, nor ignorant, but they wanted to make sure there weren’t ramifications of what was being said to them that the CFO assumed the CEO fully understood.

The role and time commitment of advisory board members can be as regular as that of other boards meeting on the third Tuesday of each month but more likely on an agreed periodic basis plus being on call. It is this on-call function that tends to prove most valuable to a founder or CEO who can call on the advisory board member as required. This does not mean that the advisory board member isn’t put up to speed and receiving copies of financials and other reporting material sent to the CEO, but rather the advisory role is provided on demand or when the advisory board member sees something in the papers sent he thinks the CEO should be addressing.

Board Members

The modern history of companies can be traced back to investors pooling their monies to explore opportunities in the New World. Initially such companies each had their own act of Parliament and/or a Royal Charter allowing for limited liability. Over the years the use of companies has increased and the rules for the governance have become more onerous.

The responsibility of directors is not limited only to areas of expertise that they have duties of a general nature.

Boards tend to focus first on the statutory responsibilities rather than acting as mentors and coaches. Some chairman, however, in their role are specifically allocated time to work with the CEO. Some CEOs take advantage of this and use the chairman as a sounding board for taking matters to boards.

Companies and organisations are generally considered to be governed by boards. The underlying legal structure can vary dramatically from being a company limited by shares to a statutory body with the roles of board members being defined by that statute. Public companies have one set of rules, whilst companies limited by guarantee or offer rules are each different. Many not-for-profits choose to have advisory boards also.

Under the Australian Corporations Law, and the company’s laws of most countries, directors have general and specific duties and responsibilities. These responsibilities have been added to by strict liability provisions of legislation covering environment, solvency, taxation and marketing. In contrast, members of the advisory board do not need to worry about the day-to-day operations of the company and need only consider the matters referred to them. Advisory board members are often appointed for very specific roles. A number of years ago I served first as a member of an advisory board and later its chair which had the sole responsibility of being the audit committee (later Audit Board) for the Gold Coast City Council. Our role was in a charter was clear. Our liability was limited to our exercise of professional skill and judgement with respect to the management of the audit and reporting processes.

As companies grow or transition from being run by the founder, they often recognise that they don’t have all the expertise in-house that they need. What they commonly recognise is they need people with other perspectives, perhaps not even knowledge of their own industry, but rather someone or a couple of people they can talk to. An advisory board often provides expertise outside the founding group. They can provide recommendations and pose questions which often staff will not do with their fear of being found wanting.

It is increasingly common for professional services firms such as architects and consulting engineers to say we need to do more than just provide drawings we need to understand why the client wants them and how can they help finance the client to achieve their goal. Many such firms over the years have developed strategic alliances which means they know to turn to when they have a business opportunity, but also sometimes they want someone to talk to about a problem who already has a general knowledge about the company and especially the people. This they see as a role of an advisory board member. What is important is they want to be able to say that their client we have this expertise within our company.

From a business owner’s perspective and advisory board member can be heard and ignored. The same cannot be said for a board member for if they vehemently disagree with the decision, they will feel forced to resign or leave extensive notes in the board minutes of why they did not agree. This is not something most owners want the auditors or bankers to see.

As companies evolve the founders often see the need in the future for external directors. In the process of carrying management and staff they will often appoint future potential directors to an advisory board role so that the movement to traditional corporate management via a board is not seen as a staged approach.

Conclusion

Whether a company needs a board and/or an advisory board is a matter for careful consideration and often reflects stage of evolution of the company itself. At Projects RH we are normally working with companies who are seeking to take a relatively large step forward. In seeking to do this they need to raise money. When raising money, they need to demonstrate to lenders and investors that they have good corporate governance. Often, we are asked the question about the diligence of the board, their areas of expertise and their involvement. Additionally, we are often also asked who is advising. This question is not so much about who was advising on the raising of money but who was advising on how it is spent. Lenders and investors care about ongoing relationships not just transaction services. A number of our clients are technical service companies; investors and bankers need to be shown that any concerns they may have are either met by the strengths of the board or advisory board members.

In working with companies if we see a shortcoming, we do try to provide them with an answer. We are fortunate in our ecosystem that we can point them to potential directors or advisory board members with backgrounds in finance, law, accounting, marketing, engineering, mentoring… A number of our clients have had to appoint either new board members or advisory board members and they have generally accepted our recommendation.

The need to have a suitable board or an advisory board generally comes from accepting a new challenge. At Projects RH we enjoy with working with our clients through accepting new challenges.