Bringing new perspectives to the table.
Leading public companies are increasingly creating advisory boards to augment the firepower of their statutory boards.
Unilever created a Sustainable Living Plan Council in 2015 made up of external specialists in corporate responsibility and sustainability, who guide and critique the development of the company's sustainability strategy.
Three years ago, Target announced the formation of a Digital Advisory Council, a panel of technology leaders to help the company accelerate its digital transformation and its omnichannel go-to-market strategies.
And medical device maker St. Jude Medical last year announced its intention to set up a Cyber Security Medical Advisory Board to provide advice on cybersecurity standards for medical devices.
While statutory boards may include a specialist or two in critical emerging areas of business, boards have few dedicated seats thanks to low turnover, required financial expertise, and preference for CEOs and other generalists. That's where advisory boards come in.
In the cases of cybersecurity and digital transformation, the evidence suggests that statutory boards are adding few new members with experience in either area, this despite high-profile security breaches in recent years. As our firm's forthcoming 2017 edition of Board Monitor documents, only about 10% of the 421 new directors appointed last year had any experience at any point in their careers with digital/social media. And the percentage of new appointees with experience in risk (financial or cyber risk) at any point in their careers was only about 6%.
However, Banco Santander has created an eight-member international advisory board that will provide strategic advice on a broad set of issues including innovation, digital transformation, cybersecurity, new technologies and changing customer expectations. Chaired by former U.S. Secretary of the Treasury Larry Summers, the Advisory Board will also offer insights on capital market trends, corporate governance and talent, brand and reputation, and regulation and compliance.
Why an advisory board?
As the example of Santander suggests, advisory boards may be created to supplement the statutory board's knowledge on any issue deemed important to the company's future and provide access to leading experts on those issues. These include disruptive new technologies in the company's industry like blockchain and fintech in financial services, the Internet of things in industrials, driverless cars in automotive, or wearable health monitoring in health care.
Advisory boards can also provide fresh perspectives on strategy, economic trends, or specific geographic markets and regulatory regimes; and they can alert the statutory board to issues that may not be on their radar screen.
Further, the numerous mandated duties for which statutory boards can be held legally responsible — audit, compensation, compliance, risk management, succession planning — necessarily take precedence over more specialized concerns or rumination on big-picture, long-range trends. And for directors of companies the demands on their time and attention can be exponentially greater in extraordinary circumstances — a company crisis, mergers and acquisitions activity, or the appearance of an activist investor.
For instance, the board of a leading global bank facing a major crisis conducted more than 50 meetings last year (most of them by phone); the number of meetings for a major technology company believed to be in play exceeded 100 (again, most by phone).
The fresh perspectives that advisory boards offer can help the statutory board resist groupthink, supplement their knowledge and arm them for more nuanced oversight. At the same time, the advisory board's suggestions are just that — nonbinding suggestions. The statutory board and management are free to incorporate as much or as little of the advice as they judge appropriate. For CEOs, advisory boards can provide a sounding board for new ideas, a source of potential mentors (which are in short supply for chief executives) and a wider network of high-level contacts.
Advisory boards can also attract highly accomplished leaders and experts who would otherwise be unavailable because:
• Members are not subject to director liability or to the intense public scrutiny that statutory boards face.
• The tighter focus of advisory boards enables fewer but more efficient meetings, typically two a year, making fewer demands on the time of already very busy people, many of whom might be otherwise fully “boarded-up.”
• Advisory boards, as with statutory boards, offer members the opportunity to expand their experience and knowledge and network with other members.
Companies enjoy wide latitude in the composition and use of advisory boards because they are not governed by statutes or regulations. While best practices include many of the proven principles of statutory board governance, it's important to adapt them to the unique character of advisory boards. A sampling of the best practices we've observed include the following:
• Be clear about aims. Unlike statutory boards, whose aims are established by law, advisory boards are free to focus on whatever the company deems desirable. That focus should be clearly defined, whether it is on a particular issue like cybersecurity or larger issues of strategy. The general profile for members should also be specified. For example, for an advisory board focused on digital transformation, the spec might read: “Members shall be prominent and respected executives or practitioners with significant experience in artificial intelligence, machine learning, social media, digital marketing or digital strategy.”
• Clearly define relationships. Draw a bright line between the function of the advisory board and the statutory board. Simply put, the advisory board offers advice; it does not make decisions. Nor should it be used to fill gaps in competencies like financial acumen that more properly belong on the statutory board. As a practical matter, the statutory board and CEO should determine who is the most appropriate point of contact with the advisory board, who should have direct access to them, and who should join them at their meetings.
• Create a charter. This document lays out the structure, responsibilities, and terms of service for the advisory board and its members. Because advisory boards entail no legal requirements for committees or compliance duties, this document can be far shorter than a conventional board charter.
• Determine how members are to be proposed and approved. They might be proposed by the chair of the statutory board, the lead director, or the CEO, and perhaps in consultation with the relevant functional leaders when the advisory board is to focus on their disciplines. In any case, members should be approved by the full board.
• Manage the composition of the group as a portfolio of skills. Don't merely aim for a panel of all-stars (though, given the attractiveness of advisory board service, you are likely to attract eminent individuals in any case). As with the statutory board, assemble a set of members whose competencies complement each other and collectively best address the specific purpose of the group. That purpose, and the range of competencies required to fulfill it, will help determine the size of the board. For example, if you find a candidate who brings two essential skills, you can reduce the number of members accordingly.
• Keep members appropriately informed. Because advisory boards typically meet only two-to-four times a year, their members have even less contact with management and the ongoing affairs of the company than statutory directors. Therefore it is particularly important, during the gaps between meetings, to provide them with a steady, manageable stream of well-organized information relevant to their purpose, not simply bury them under a mountain of material immediately before a meeting. You should also have appropriate confidentiality agreements in place and withhold information that properly belongs only with the statutory board.
• Organize meetings for maximum effectiveness and efficiency. Unencumbered by time-consuming committee work or other formal duties, advisory board meetings can be tightly focused while leaving considerable leeway for exploration and discussion. Pre-meeting materials and a carefully constructed agenda, distributed in advance, are essential for keeping what could otherwise be a freewheeling bull session on track. The agenda is often created by the advisory board chair in consultation with the statutory chair or CEO and with input from functional leaders when appropriate.
• Formalize feedback. Determine what form the advisory board's output will take — a set of recommendations, general observations, a summary produced by an attendee, or individual summaries from each member. Determine, also, how those results will be distributed, to whom, and with what expectations for response or action. In many cases, we are finding that the chair and the CEO are asking the advisory board members to do a written review of each advisory meeting after the meeting is complete.
• Consider term limits. All boards benefit from processes that ensure the group is periodically rejuvenated and replenished with fresh ideas. Term limits help accomplish this for advisory boards—just as they do for statutory boards. Setting term limits also gives the company a valuable chance to reevaluate the mix of skills the board contains. Consider setting a four-year term that is extendable.
With the attractiveness of advisory board service and the absence of legal requirements, establishing and populating an advisory board is less demanding than creating, for example, the statutory board for a spin-off. Ask yourself one question: Given the state of our industry, the circumstances of our company, and the burdens on our statutory board, could we benefit from the high-level, specialized knowledge of experienced leaders?