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Learn how a board of advisors can benefit your firm

Entrepreneurs are often faced with making decisions regarding employment policies, insurance coverage and strategic alliances. Many would like to have other professionals provide some insight, but fear the expense and loss of control entailed in hiring outside experts. One solution for you may be to form a board of advisors.

A board of advisors typically consists of three or four trusted individuals, each with expertise in a particular aspect of your business. If strategic alliances are on your horizon, seek out industry experts who have experience in forming such partnerships. They can keep you up to speed on industry trends, or advise you when the time is right to seek a partnership.

A board of advisors differs from a board of directors in some important ways. A board of directors is an entity that, once created, is charged with a fiduciary duty to protect the corporation's shareholders, creditors, employees and even the community where its facilities are located. The failure to exercise this fiduciary responsibility when making decisions could render a director personally liable. Companies can and do buy their directors and officers liability insurance to protect them, but the cost is usually prohibitive for most small businesses, according to Vanessa L. Smith, a Chicago-based attorney who advises growing businesses on human resources matters. Thus, recruiting qualified individuals who understand the duties of a director is often difficult.

A board of advisors, on the other hand, is designed to dispense advice, not make decisions. Therefore, advisors aren't exposed to personal liability for the affairs of the company. Because there is no legal standard for a board of advisors, you are free to design it in the way that works best for your firm. In fact, a growing number of companies use both boards of advisors and directors, choosing to have the advisors meet first to offer technical suggestions on various topics to be considered by the directors.

In addition to helping a CEO operate her business, a board of advisors can also convey creditability to the marketplace. This is especially true in the technology and biomedical sectors, where the presence of noted technical and academic experts on a company's board of advisors significantly raises the profile of the company and may enhance venture capital funding opportunities. Most angel investors seek logistical information about a potential investment, and a place on the board of advisors offers a ringside seat free of personal liability and spares a founder having to relinquish control.

To be most effective, boards of advisors should meet only periodically, such as quarterly, and generally only to consider specific business issues. Advisors should be provided with background information prior to meetings to help them reach informed opinions. Delivering background information to advisors at least two weeks before the meeting, together with a written statement of the questions/issues they are to consider, is ideal. Keep the meetings focused and remember that no decisions are to be made at the meeting. To do so can risk personal liability for the advisors.

Select board members who have the required skill set and time to serve, such as your firm's outside accountant, legal advisor or insurance agent. They will have a vested interest in the business, as well as a historical reference for most issues. "Make sure to avoid any conflicts of interest with active professional advisors," says Smith. "And don't be afraid to let your board evolve as your business does. Ensuring that historical knowledge is transferred from existing members to new members is critical, so that new ideas and concepts are constantly brought to the table."

A typical board of advisors meeting should last no more than three hours, including time for a meal. An advisor should be prepared to devote at least one hour of preparation time for every two hours of meeting time.

In terms of compensation, a general rule of thumb is that an advisor should be compensated at a rate comparable to a chief executive officer. To determine this, figure out the hourly rate you or your company's CEO is paid, and apply it to the number of hours spent at the meeting, plus preparation time.