Advisory boards are often viewed with mixed sentiment. Some praise their ability to add expertise and credibility, while others dismiss them as superficial additions to a pitch deck. The truth lies somewhere in between: while not always a silver bullet, advisory boards can be extremely powerful tools for strategic growth—if structured and utilized effectively.
This article provides a comprehensive guide to understanding, forming, and managing advisory boards, including valuable insights into their purpose, structure, economics, and how to avoid common pitfalls.
What Is an Advisory Board?
An advisory board is a group of subject matter experts assembled to provide strategic guidance to a company’s leadership. Unlike a board of directors, which has formal voting authority and fiduciary duties, an advisory board’s role is to offer advice without any legal responsibility or governance authority.
Advisory boards are most commonly used to address operational gaps, provide specialized knowledge, or open doors to high-value networks. When used effectively, they can:
- Sharpen the company’s vision and growth strategy.
- Fill skill gaps within leadership teams.
- Provide connections and credibility to attract investors, partners, and customers.
Key Differentiation: Advisory Board vs. Board of Directors
The main differences between an advisory board and a board of directors (BOD) are:
- Fiduciary Duty: Unlike a BOD, advisory boards have no legal responsibility to act in the stakeholders’ best interests.
- Lifecycle: BODs typically exist in perpetuity, while advisory boards are often project-based with defined lifespans.
- Control: An advisory board has no voting rights, allowing companies to benefit from its guidance without relinquishing control.
Why Build an Advisory Board?
Advisory boards have proven effective in boosting performance. A study by the Business Development Bank of Canada (BDC) revealed that companies with advisory boards saw 24% higher annual sales growth and 18% greater productivity compared to companies without them.
Four Clear Indicators You Might Need an Advisory Board
- Skill Gaps in Leadership: If your leadership team lacks expertise in specific areas (e.g., fundraising, marketing, digital transformation), advisors can fill those gaps.
- Big Goals but Limited Resources: Planning to explore a new market, raise funds, or launch a complex product? Advisors can provide critical insights and connections.
- Stagnation or Strategic Rut: If your company is plateauing, a diverse group of advisors can offer fresh perspectives.
- Need for Credibility and PR Value: High-profile advisors can boost external perceptions of your business, attract investors, and strengthen partnerships.
For example, companies like GE and Target are leveraging advisory boards to improve their digital strategies. GE’s digital advisory board was instrumental in launching successful initiatives, such as the “moon boot” sneakers—a creative marketing idea that sold out in minutes.
Advisory Board Economics: Costs and Compensation
While advisory boards can deliver strong returns, companies need to understand the financial dynamics involved.
Compensating Advisors
There’s significant variability in how advisory board members are compensated:
- Cash: Compensation typically ranges from $100–$500 per meeting for startups, up to 50% of what board directors earn in larger corporations.
- Equity: Startups sometimes offer equity (~0.1%–2%, vested over time), but this should be carefully managed.
- Unpaid Roles: Surprisingly, some advisors work pro bono, especially in Canada, where 57% of advisory boards are uncompensated.
An ideal compensation model often mixes cash and equity:
- Cash and equity boards were found to have the greatest impact, according to a survey by Advisory Board Architects (ABA).
- Conversely, boards compensated with equity-only often failed to deliver their full potential.
Sizing the Board
Research shows that collaboration declines significantly in groups larger than six people. The sweet spot for most advisory boards is five members, striking a balance between diversity and effective communication.
How to Build an Effective Advisory Board
A successful advisory board isn’t assembled haphazardly. Below is a five-step framework for creating and maintaining one that delivers measurable results.
Step 1: Identify Clear Objectives
Pinpoint the specific needs your advisory board will address. Align their role with your strategic goals, whether it’s improving your capital-raising strategy, breaking into a new market, or refining your business model.
Measurable goals are critical. For example:
- “Generate three major new customer leads within six months.”
- “Develop a go-to-market blueprint for our SaaS product within a year.”
Without clear goals, your board risks becoming directionless, wasting time and resources.
Step 2: Create Detailed Job Descriptions
Clearly define the roles and expertise needed. Include industry knowledge, network access, and specific skills. Avoid generalized terms—each member should bring a unique perspective to the table.
Step 3: Recruit Strategically
Start by identifying candidates who meet your needs. Aim for professionals with minimal overlap between your existing network and leadership team. Prioritize:
- Subject matter experts.
- Industry leaders with relevant experience.
- Influential connectors with key introductions.
Recruiting often requires a direct outreach approach. Many qualified professionals respond enthusiastically to requests, especially if your business and mission resonate with them.
Step 4: Formalize the Relationship
Even if informal, there should be a documented agreement to set expectations around:
- Commitment: Time and meeting frequency.
- Compensation: Cash, equity, or other arrangements.
- Deliverables: Outcomes tied to specific goals.
Use a simple memorandum of understanding (MOU) to ensure clarity.
Step 5: Track Performance
Establish Key Performance Indicators (KPIs) for your advisory board. Routinely evaluate progress toward goals, and don’t hesitate to make adjustments. For example, if an advisor fails to provide meaningful contributions, consider transitioning to someone more suited to current needs.
Calculating Advisory Board ROI
Before establishing an advisory board, weigh potential costs against expected benefits.
- Costs: Include stipends, travel, and time spent managing the board.
- Benefits: Can be measured through new customer leads, investor connections, product insights, or PR value.
For example, a technology company launching a new product might estimate the advisory board’s value by:
- Securing 3 major distribution leads worth $2M in annual revenue.
- Attracting attention from influencers and press, boosting website traffic and engagement.
- Cutting learning curves by leveraging expert guidance on pricing and scalability.
The result? A relatively low advisory board cost ($15,000–$20,000) could generate significant ROI.
Mistakes to Avoid
- Listing Advisors Without Approval
Always secure formal acceptance instead of assuming an advisor’s participation. Prematurely listing names on pitch materials can damage credibility. - Under-Communicating
Keep advisors well-informed, especially during major strategy shifts. Uninformed advisors risk sharing outdated information that could harm your reputation. - Over-Offering Equity Too Early
Grant equity only after the advisor delivers measurable value. Consider performance-based vesting schedules to avoid costly missteps. - Letting Relationships Drift
Advisory boards need clear timelines. Once their purpose is fulfilled, formally conclude the relationship to avoid misunderstandings.
The Bottom Line: Are Advisory Boards Worth It?
When planned and executed thoughtfully, an advisory board can offer immense value, from refining your strategy to opening doors that were previously out of reach. However, they’re not for every situation—consider your objectives, costs, and internal capacities before proceeding.
As Cléroux of the BDC notes:
“The greatest impact advisory boards have is shaping the vision of the company. Advisory boards force business owners to step out of day-to-day operations and focus on the big picture.”
Approach this process methodically, and your advisory board can become a clear catalyst for growth—bringing expertise, credibility, and transformational opportunities to your business.