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.
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.
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.