The Power of an Advisory Board

 In 2023, the Startup Genome completed a five-year study of some 10,000 global startups and found that companies using five or more advisors grew seven (7) times faster than companies with no advisors:

Even if the company had just one or two advisors, the startup doubled its growth rate compared to companies with no advisors.  It should be noted that Advisory Boards are non-fiduciary; i.e. they are not the same as a Corporate Board of Directors. Advisory Boards serve the founder(s) of the startup, covering critical execution areas or weaknesses that are important to growth and success. Advisory boards are at the discretion of the business owner and are not required for a startup business.

 

Board of Directors	Advisory Board
Has authority to make decisions such as approve investments, set executive compensation, etc.	Lacks authority, non-binding recommendations are made directly to the CEO
Serves long term such as 10 or 15 years with an emphasis on financial results	Serves short term such as two years to assist the CEO in solving various problems
Meets for a full day on a quarterly basis	Meets every other month for 1 or 2 hours
Shareholders vote to form board members	CEO selects board members based on skill gaps that are not filled by existing personnel
May be liable for company results and thus, Director and Liability insurance is needed	No liability, not required or regulated by government agencies
Part of a formal corporate structure, serving the shareholders of the corporation	Not part of corporate structure – serves the founders or CEO

“We know for sure that fast growing companies have advisory boards. Only 8% of companies use advisory boards and about half of those companies using advisory boards are not using them correctly.”

-          Cathy Fischer, The AB Platform

Advisory boards bring experience and wisdom that is often lacking with startups. Think of it this way: If you could have access to five (5) experts to help you run your business, who would you choose? Like hiring an employee, what are their backgrounds, experience, and special areas of expertise that empower the company.

As a starting point, describe key advisory areas where you need help; such as industry knowledge, recruiting key personnel, obtaining product market fit, attracting customers, or developing artificial intelligence. You should think big and bold when developing an advisory board. Do not be afraid to reach out to well respected people who often are willing to help because they enjoy the challenge of adding value for startups.

Building a strong Board of Advisors will take some time and effort, but the strategic guidance and connections they provide can be invaluable for growth. This is especially true if the company lacks a strong management team; i.e. you need a core execution team to help without a lot of expense. You should also seek a high degree of diversity. For example, if a single customer accounts for substantial sales for the company, consider having someone from the customer’s company serve on your board.

Advisory boards work best when there is a firm commitment of time, scheduled for the calendar year and the group works as a team to grow the company. If possible, try to have the same level of compensation for all board members. This compensation often takes the form of advisory shares from the corporation. For small businesses that are pass-through entities (non-corporate), simply seek out some mentors or experts that can help you execute on the basics and meet on a regular basis.  

“Advisory shares are a type of equity compensation that companies use to incentivize advisors. In exchange, advisors are expected to provide guidance, services and support to the company. Equity compensation aligns the interests of advisors with the company. It also creates a sense of ownership and commitment.” -Cap Board

The goal is to have a highly cohesive group, working together to grow the company. If you have board members who fail to add value after two or three meetings, then correct the situation just like you would if you had a poor performing employee. In some cases, you may need to re-launch the board if members are acting too much on their own and there is a lack of open and honest communication. You also need a designated person to schedule meetings, release meeting agendas and communicate minutes and action items from each meeting. A final point; conduct an annual assessment of your board – how effective is the board, what changes need to be made, is the board meeting the expectations of the CEO?

“The best place to find members of your startup advisory board is within your very own network. It’s common for mentors to become formal advisors if they’ve been valuable to you in the past and you’ve been able to form a trusting relationship with them.” – Lena Eisenstein, BoardEffect

The evidence is clear – advisory boards are a powerful asset for growing startup businesses and there are other benefits to having an advisory board such as CEO coaching, avoiding group think and giving your company increased creditability. Don’t go it alone; otherwise, you will only hamper your long-term growth.  

How to Acknowledge Reality

Staying grounded in reality is not easy these days. We are bombarded with so much noise, misinformation and flashing news alerts. It’s easy to get distracted from what is truly important. Getting grounded in reality requires a very sound principle known as Critical Thinking. If more people would simply think in a critical way, they would break through the clutter and see the truth.

It all starts with listening to various viewpoints and asking questions. A good framework for asking questions is to cover the W’s and the How: Who, When, Where, Why and How. Your goal is to aggressively dissect the issue from various sources and through a series of questions you filter out what is false and retain what is true.  Take for example a small child who is always asking questions about how things work – they have a natural curiosity of seeking the truth. Decisions are deferred until you compile enough evidence to reach an objective and rational conclusion. The challenge is to remove your prejudice feelings and just like a child, remain open-minded, finding your way to the answer.

In order to reach a sound conclusion, you will have to apply reasoning. This typically takes two forms:

Deductive Reasoning (top down) and Inductive Reasoning (bottom up). Deductive reasoning is when you arrive at an answer and you decide to apply it. For example, you have concluded that nasal spray is a better way of treating your allergies as opposed to taking pills. When you get an allergy you try it and see if your deductive reasoning is correct. Inductive reasoning is the opposite – you are not sure why the problem is taking place and you try to identify the reasons. Perhaps you develop a list of things that could be causing your allergies. One by one you test and work through the list until you find the items that are causing the problem.

Reasoning is not easy. There are so many ways of getting derailed. Here are 18 areas to watch out for per The Thinker’s Guide to the Art of Strategic Thinking by Linda Elder and Richard Paul:

1.            Jumping to conclusions

2.            Failing to think about the implications of your decision

3.            Not staying focused on the goal or objective, wandering off

4.            Not grounded in the reality of your current situation, too idealistic

5.            Not recognizing contradictions or evidence that says the opposite

6.            Asking vague questions or giving vague answers to questions – If you don’t know, just say so

7.            Reliance on information that is incomplete, inaccurate or not relevant

8.            Inferring something about the situation from your own experiences, but it doesn’t fit this particular situation

9.            Distorting information or evidence to advance an agenda

10.          Not recognizing your assumptions

11.          Spending too much time on things that are minor or insignificant to the decision

12.          Not aware of your own bias or short comings

13.          Unable to communicate effectively

14.          Improper use of words

15.          Key ideas were not recognized

16.          So called experts are not qualified or really experienced with the subject

17.          Over simplifying what is essentially very complicated

18.          Forming concepts that are too theoretical and not practical enough

If we leverage this list and distill it down, then it becomes important to follow a set of principles. These principles include:  

1.            Clarity – Remove the ambiguity to put focus on the problem. You can better understand a problem by comparing it to similar problems or re-phrasing the problem. 

2.            Accuracy – Don’t accept what someone tells you. Make sure it is true or false before accepting it. You want your decision to be based on accurate evidence. In some cases, you may have to validate it.

3.            Precision – It can help to be precise with statements. For example, by quantifying a statement you bring increased precision to what you are saying. For example, it is accurate to say: All human beings have a limited life span. It is more precise to say: Human beings have an average life span of 69 years. By providing more details, you become more precise. 

4.            Consistency – When you take a position, it should not be in conflict with known facts. Your decision should be consistent with the evidence that supports the decision. For example, Politicians are often criticized for making statements to one group and then changing the statement to fit another group. You need to be consistent in what it is you say or decide. 

5.            Relevance – You should focus on those things that are relevant to the decision. It is not unusual to spend excessive time on noise and other information that has nothing to do with your problem or issue. There should be a connection or relationship with the information that is under consideration regarding a decision. You also may have to consider the significance of the evidence to your problem. Some variables or factors are much more important than others.  

6.            Sound Evidence – Critical thinkers look for good evidence and ask: Why should I accept this? Examples of evidence include: Samples, Observations, Testimonials, Comparisons, Research, Experiences, Subject Matter Experts and Expert Witnesses.

7.            Good Reasoning – When you make a decision or take a position, you should have good reasoning behind the decision or position. Your thinking has support behind it based on observations and factual evidence.

8.            Depth – Your viewpoint, position or decision should speak to the problem or issue. It must be deep enough to explain it or possibly solve it. You sometimes may fall short of not going far enough. Perhaps your analysis was cursory and incomplete. You have to speak to the issue and not avoid it.

9.            Breadth – Critical thinkers consider various viewpoints. They seek to remove bias by considering other opinions. A wide net is cast in how a problem is viewed – we enlisted Engineers, Artist, Women, and others to uncover different perspectives.  

10.          Fairness – It is important to be fair to all sides. For example, if you spend all of your time listening to liberal viewpoints without listening to conservative viewpoints, then you are not being fair. You cannot let your own personal feelings or viewpoints cloud your decision. 

Finally, as you gain more experience and knowledge across a wide range of situations, you can start to act on intuition. This is the advanced level of decision making whereby you have mastered the principles described in this article. This requires a lot of experience with decision making across a wide range of situations. Two books that can help give you insights behind intuition are: Blink by Malcolm Gladwell and The Go Point: When It’s Time to Decide by Michael Useem.

To Understand Leadership, Understand Followers

People want to be led and not controlled. Anyone involved in managing people should be a leader. This is what your people are looking for. You can start by communicating the direction for others to follow with an emphasis on delegating and supporting their efforts.  You want people to be motivated and productive, reaching their full potential in the work place. This requires staying out of the way and not being a micro-manager, but still holding people accountable for performance. 

From Shareholder Value to Stakeholder Value

The most significant sources of value for an organization are elusive, non-quantifiable and not easily discerned. They include things like talent, leadership and reputation. In order to get aligned around these elusive sources of value, companies should take a broader view of value – how do we add value to our stakeholders and not just the shareholders. The more traditional view of value has a narrow focus on the numbers and can include things like:

• Short-term reactions to valuations which are sometimes dramatic such as mergers or layoffs
• A bottom-line focus on earnings from quarter to quarter
• Slow to respond to change where new ideas are not aggressively developed
• A culture where value through intellectual capital is not widely practiced
• Business success is highly centered around how we increase shareholder value
• Sources of value are isolated or fragmented and not coherent across the entire company such as having the right culture

Let’s contrast this to a broader stakeholder view of value:

• Sustainable, competitive thinking drives the vision and the company has much more long-term strategic focus
• Value cuts across all parts of the company including the entire value chain
• There is an easy flow of ideas and a culture of innovation
• People who drive value for others (inside and/or outside the company) are promoted and advance within the company – it’s not just about meeting the numbers
• There is an incremental approach to rational decision making that is rooted in predictive analytics
• The bottom line is more about value and not earnings and this requires a broad and long-term view of the future

“A value is a belief in action. It is a choice about what is good or bad, important or unimportant. Values shape behavior. Until a value is acted upon it remains an aspiration. Values are hard to detect; yet they underpin organizations like the foundations of a house. If the foundation is weak, then the house falls down.”

- Unblocking Organizational Values by Dave Francis and Mike Woodcook

One way of moving away from shareholder value to stakeholder value is to identify real value drivers for your stakeholders. These bottom layer drivers will give you great insight into what really works on reaching the upper shareholder layer of value. This type of thinking needs to permeate all levels of the organization so that eventually, everyone is asking the question: How does my behavior or actions impact value and what can I do to create more value?

“What people value causes organizations to have cultures and acquire the reputations they have. World-class companies usually have cutting-edge technology, superior management systems, outstanding electronic systems, and database management, but their reputations all come back to human beings – the people who make decisions and take actions in these organizations, while using technological and management systems and tools. One of the critical characteristics of successful companies is a careful balance between the values, interests, goals, and objectives of the organization, and the values of the individuals who work for it.”

- Value Driven Management: How to Create and Maximize Value over Time for Organizational Success by Randolph A. Pohlman and Gareth S. Gardiner with Ellen M. Heffes

One common trap to value creation is to become overly pre-occupied with metrics. You should not confuse value creation with value-based metrics. Value type metrics are widely accepted and understood – things like EVA, Cash Value Added, Return on Investment, etc. However, the biggest sources of value (things like leadership, innovation, ethical behavior, knowledge, etc.) are not easy to quantify.

“Value is added in the sense that the situation is better than if nothing was done at all. But value is destroyed in the sense that the optimal value has not yet been implemented.”

- The Value Mandate by Peter J. Clark and Stephen Neill

Value-creation is a constant and difficult struggle since we can't predict the future and most important drivers of value are not measurable. Therefore, it may be appropriate to focus on only a few key drivers of value since organizational resources are limited. For example, one of the ultimate drivers of value resides in your people. So if you want to start at one single point on real value creation, begin with your human resource capital. One reason this is important is because people transcend and help you meet the value-proposition required by your other stakeholder groups – customers, suppliers, partners, etc. People represent the fluid dynamics that binds all stakeholders, covering the full range of value-creation in this age of stakeholder value and not just shareholder value.

“We don't believe in the word ‘measurement.' We don't supervise or manage people here; we lead. And we don't have employees; we have people. We don't have human resources; we have a people department. Our emotional contract with people is to treat them with respect, allow them to have input into the company, and allow them to self-actualize within their jobs.”

- Stephen Smith, CEO of WestJet