Written by Jack Davis, former SDSU Extension Crops Business Management Field Specialist.
A board of directors is a vital part of the governance and constitution of many corporations. A board of directors is formally involved in the business and is legal responsible for the overall governance of the corporation. An Advisory Board has no legal authority and no authority to make any final business decisions. The Advisory Board for small businesses and farms is organized to give advice, input, and act as a sounding board for management. Small businesses and farms organized as Limited Liability Companies (LLC) or Limited Liability Partnerships (LLP) are governed by state law and are required to file annual reports. The boards of these family farms and businesses are many times a paper board only. Its purpose is limited to approving businesses’ financial statements, electing officers, and filing reports that are required by law. The board is generally comprised of all family members that meet for a short period of time once or twice a year. It is common for the board to be made up of the same individuals who are family members, managers, and owners of the family farm business. Their roles are mixed, which sometimes lead to conflict and inefficiencies in overseeing the family business and in setting its strategic direction.
As family farms grow and ownership structure becomes more complex, the value of the board becomes more important. It becomes necessary for the board to play an active role in setting strategy and reviewing management's performance. This requires the board to meet more often and have the expertise to push and challenge family farms’ management. At this point, a family business board needs to be more organized, focused, and open to independent directors. Before making the move to a fully independent board, many family businesses function well with an advisory board. The advisory board complements the skills and qualifications of the current board of directors while challenging management to higher achievements for the family and business. The advisory board works closely with management and directors to identify key strategic issues facing the family farm business.
An advisory board is comprised of respected and experienced individuals that provide the family and business with critical independent review required by a growing family business. Advisory boards are most effective when limited in size, often from three to seven, depending on the size of the family business. The board members should have expertise in the family businesses industry and/or other skills that will complement the strengths and weaknesses of the current board. Many times senior management will be a part of the advisory board to aid in coordination and communication for board agendas and meeting arrangements. Advisory boards typically meet 3 to 4 times a year.
In addition to setting strategy and general oversight, the advisory board can add value by developing a succession plan, ensuring the availability of financial resources, ensuring the adequacy of internal controls and risk management, and reporting to minority owners and other interested parties.
The advisory board provides focus on the potential for the business and the family.
Choosing Members
Board members should not be:
- Current suppliers.
- Friends of owners with no relevant expertise.
- Existing providers of service to the family farm business.
- Individuals having conflict of interests.
- Persons who are overcommitted and not able to provide due diligence.
In choosing advisory board members the family farm business needs to choose individuals that will:
- Add value and supply any needed skills in the area of strategy and developing vision.
- Add expertise in operations management.
- Provide management direction.
The family business should choose advisory board members with:
- Integrity and accountability.
- Industry experience.
- Team work ability.
- Proper business judgment and strong analytical skills.
- Expertise in relevant areas such as strategy.
The Bottom Line
An advisory board structure may help in building management skills, use of decision support systems, and improvement of analytical thinking. The advisory board provides a system to explore a range of ‘what–if’ scenarios. Exploring the financial impact of scenarios provides an opportunity to plan response strategies in advance. This allows time to think calmly through how the business might react if that scenario was to occur. Would your business benefit from the formation of an advisory board? It may well change your business and your future.
