Assistance from the Board

Understand the differences between boards of directors and advisors and how they both can help your business.

By Anthony Birritteri, Editor-in-Chief On Mar 5, 2018

Among the choices business owners have when seeking guidance on growing their companies are the board of directors and the board of advisors. Of course, a business that registers itself as a corporation automatically must form a board of directors – and in New Jersey this board can consist of just one person. However, with this registration comes the legal, more-rigid board structure in which, candidly, the board has the power to fire the company founder if he or she is deemed as not being the best person to run the company (think Steve Jobs being let go by Apple – later returning to the company when Apple acquired NeXT, another Jobs startup; or the dismissal of these other business founders: David Neeleman of Jet Blue; George Zimmer of Men’s Warehouse; and Sandy Lerner, co-founder of Cisco, to name a few examples).

Businesses that are not registered as a corporation (C-Corp or S-Corp), but an LLC, LLP, general partnership and sole proprietor, can create the more flexible board of advisors, where advice is given, but realistically, if not adhered to, does not mean the company founder is shown the door.

“The board of advisors is non-binding from a legal standpoint. It is a group of individuals who give guidance to officers and owners of the enterprise,” explains John Cromie, a partner at the law firm of Connell Foley. “Meanwhile, [officially] the board of directors is charged with overseeing the management and operations of the company.”

Cromie says the intent of both boards is similar. “Both are important to the success of a business. They help it think more in-depth and long-term on a macro-basis, while entrepreneurs and small businesses are busy dealing on a day-to-day basis with the short-term issues and challenges of their ventures.”

According to John Vanarthos, a partner at the law firm of Norris McLaughlin, people creating a business should reserve time to “not work in the business, but on the business … and the board of directors is the place that allows this to happen.” Whether the board meets once a year, once a quarter or once a month, “you get together and create an agenda: What are the goals for the year; what do we have to tackle; what are the big things we need to address?” he explains.

Choosing Board Members

Perhaps the most important advice experts give when choosing members for the board of advisors is to select someone who is independent, who has no financial stake or isn’t employed by the company. “You want people to make unbiased decisions … not based on their financial investments or their employee status,” Vanarthos comments.

The next step is selecting people who bring the skills set and knowledge that the business owner is lacking. “You want to pick a team that will supplement what your level of experience and education is,” says Alfonso (Al) Izzi, COO and director of the Small Business Development Center (SBDC) at New Jersey City University (one of 12 SBDCs throughout the state). “For example, if you are weak in finances or marketing, you want someone who could help you in those areas.”

Who to bring on board depends on the business and its related industry, but general advisors or directors should come from the fields of law, accounting, human resources, to name a few examples.

“You are trying to get as broad a base as possible of expertise and judgement,” Cromie says.

He adds that the most successful entrepreneurs want to embrace diversity of opinion because it challenges underlying assumptions and practices. “It can be threatening at a certain level because it is change, but it can be helpful to the long-term viability of the company,” he says.

A Functioning, Vibrant Board

As mentioned previously, if a business registers itself as a corporation, it must, by law, have a board of directors. However, the real question, according to Vanarthos, is: “Do you have a functioning board?”

As he explains, “There are many businesses that have incorporated, with their lawyers or accountants helping them with the process and naming a board of directors. However, the founders may not even realize this. For example, two brothers open a chain of restaurants, and their lawyer creates a board of directors … probably the two brothers, but they are unaware of this. So, the board technically exists, but it’s not functioning. … The board needs to meet and be a venue where people conduct their strategic thinking and planning.”

Whether it’s a board of directors or board of advisors, the members have to be vibrant, adds Cromie. “The vibrancy is having fresh ideas, fresh perspectives,” he says. This is why there are usually term limits on a board … so that directors don’t serve in perpetuity and become stale.

Who’s the Boss?

Do all company founders have the personality to deal with board members? What about the maverick entrepreneur who only believes or takes his or her own advice?

Vanarthos laughs and says, “I can make the argument that that is the type of person who definitely needs a board. Am I saying that you can’t be successful without a board of directors, of course not, and there are lots of mavericks out there who are hardworking, smart and shrewd who, on their own, become billionaires.

Cromie adds, “Deep down inside, the owners must recognize that if they are going to succeed beyond the short term, they have to let go a little bit, and that is the biggest challenge.”

He explains that growing a company from inception to the first million dollars is challenging, but taking the company from $1 million to $5 million is just as challenging, perhaps requiring different skills, expertise and assistance.

That said, Izzi warns, “If you rely on too many outside resources [people], you may have a tendency to not understand what is really happening within your company. … You [the owner] set the culture of your firm and you want people to implement what you are doing. … You don’t want a whole [lot] of you.”

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