The small company advisory board.

Small companies are big these days:

Virtually all of our employment growth is in the small company area. The top mutual funds are in small cap stocks. Our states offer incentives to attract small companies. Even my students at Columbia Business School now want to go to work for small companies as opposed to large companies or institutions; our entrepreneurial courses are loaded.

Many of these small companies are listed on NASDAQ, have quite a few millions of dollars of revenues, and are equipped with boards of directors and all the trimmings of a public corporation.

More, however, are privately owned, have only a few millions of dollars in revenues, and come with a statutory board of directors that consists of the owner, his or her spouse, and their lawyer. That's a shame, because if anybody ever needed the advice and counsel of talented outside directors, it is the CEO of a struggling young company.

But there's no way a young company can attract--or afford--a board of experienced people ... or is there?

And there's no way an experienced person could be enticed to serve on a very small company board ... or is there?

I suggest that there is a way and it is through the formation of an advisory board. I have been involved in organizing several such board, often for former students of mine at Columbia Business School who have started entrepreneurial ventures. Here are some of the things I am learning.

Small and regional companies throughout the country are now realizing that their businesses are becoming more complicated. They, too, suffer from foreign competition and are impacted by acquisitions and mergers. In order to be competitive, they need to adopt new methods and procedures using the advice and counsel of experience individuals. And some very small and closely held companies, which are not in a position to offer directors' liability insurance, are finding that retired executives are willing to serve as advisory board members at minimal pay levels.

To begin with, it is a most rewarding experience to help a young CEO grow and stabilize his or her company. The CEO usually has had no one to go to for advice on matters he is encountering for the first time. For a small company, this can be critical.

The approach I normally take is to suggest appointing four outside advisors. I say "advisors" rather than "directors" because it needs to be made clear that the advisory board has no authority and therefore does not need directors' and officers' liability insurance. The company's statutory board remains in place; the advisory board is simply a discussion panel that meets four or five times a year to counsel the CEO.

To be members of the board, I seek out two retired executives who want to keep busy, and who have the time and interest to be active participants. Depending upon the type of business, I try to find executives who have had somewhat related experience or who have special marketing, financial, or other talents that can be drawn on. As a third member, I urge the CEO to choose a business school professor whose teaching or research interests fit the business; this is great exposure for a member of the faculty. When possible, I go on the board, or find a retired executive to do so.

Despite its strictly advisory nature, I try to have the group function as much as possible like a public board. Agenda, minutes, financial statements, operational reviews, appraisal of capital projects, presentations by key employees--all should be part and parcel of an advisory board meeting. It is a most appropriate discipline for the CEO to adopt and follow; his banker highly approves of it, and if and when the company goes public, it is off to a running start.

The only real difference, then, between an advisory board and a public one is that the CEO doesn't have to accept the advice of his advisory. But if the advice is too blatantly ignored or rejected, the advisory members may resign.

I usually suggest that the advisors be paid a fee of about $500 per meeting attended, which can bring the total board cost up to $10,000. This is a large enough sum to make the CEO work hard to get his money's worth, but small in comparison to the potential gains. The advisors probably don't need the money, but it professionalizes the relationship and obligates the advisors to work hard in return.

It is not easy for the small company CEO to learn how to work with and use his advisory board. At first, he is wary of revealing all of his numbers and problem; with time, his concern eases and productive work gets underway. Similarly, he may be hesitant to ask his senior advisors to do things for him; when he does so, he is surprised at thier alacrity to cooperate.

An advisory board can be a win/win situation. The CEO gets help, the professor gains experience, and the advisors have a useful, good time. If you know a young CEO with an interesting company, why not offer your help?