First off, let’s distinguish the difference between a board of directors and a board of advisors.
A board of directors is an elected group of individuals to represent shareholders and governed by legal responsibilities. If a company plans to go public then it is legally required to set up a formal board of directors. The executive team or the board of directors selects an advisory board – an informal group of experts. An advisory board provides valuable assistance to a company but is not financially liable to the company or its shareholders.
Excerpt pulled from an article by Cerius Executives.
Simply put, a board of advisors is in place to help an organization’s executive team without the level of formality and fiduciary responsibility that a board of directors is beholden to. Most small PEOs do not require a board of directors. However, many would benefit from a board of advisors. I don’t often see a board of advisors utilized within the PEO space; therefore, I am writing this article to illustrate the potential benefits to PEO leadership in considering this approach for their organization.
Why Consider a Board of Advisors?
Consider your current sources for information and guidance. CEOs may belong to a peer group, associations, and/or have some trusted industry friends and 3rd party advisors. A CEO’s responsibility is to guide and lead the organization. They are charged with making decisions for the good of the organization and its stakeholders. However, decisions can only be made with the known variables in the equation. Meaning, the more insight a CEO possesses, the better decision they can make. Why is it then that a lot of CEOs do not create a team of advisors to illuminate the potential within the organization’s future? Most of the time it is because of the old adage, “if it ain’t broke, don’t fix it.” That’s fine for a lifestyle business. But if you are looking to build something more, surrounding yourself with quality advisors is… well, advised.
If we look at the PEO industry as a whole, the industry is fragmented. Meaning there are a lot of players in the PEO space. Conversely, revenue within the industry is consolidated. Well over half of industry revenues are driven by the top 25 players. This means that the vast majority of PEOs in existence are on the smaller size, south of 10,000 WSEs. A PEO of this size, that wants to grow, would likely benefit from qualified advisors. The risk versus return in the PEO and advisor relationship is heavily skewed in the PEO’s favor. Capital outlay or equity grants are minimal compared with the growth a PEO can achieve with the right group of advisors.
Who Should a PEO Consider for a Board of Advisors?
While this may vary from PEO to PEO, depending on the leadership team’s expertise and knowledge, here are a few suggestions.
- Former PEO Owners and CEOs: a former CEO of a PEO whom has grown their previous PEO through various stages of scale and exit can provide valuable advice to a PEO that is earlier in its journey.
- Industry Consultants: industry consultants are able to glean best practices from their previous work and share non-proprietary insight to help a PEO develop.
- 3rd Party Providers: our industry utilizes 3rd party providers within our model. Ever think of reaching out to one as an advisor? You may get more insight in the advisor relationship than the vendor relationship.
- Current PEO Leadership: the old saying that ‘two heads are better than one” can prove true when a PEO selects an advisor whom is the CEO of another PEO. Of course, you will want to make sure that the other PEO is not a direct competitor within your marketplace and there are non-compete, non-solicitation, and NDA agreements in place. (If the relationship proves valuable to both parties, this could be a precursor to a future merger or acquisition to strengthen both entities.)
- Subject Matter Experts: looking to innovate? Selecting a subject matter expert may prove invaluable in both time and money by receiving guidance prior and during any strategic objective.
- Peripheral Industry Executives: if your PEO is considering verticalizing or expanding its offering, this could be a valuable board advisor.
Personal Example to the Benefit of a Board of Advisors
I serve on the board of a gig-economy insurance and tech company. As I got acclimated with the organization, I believed in its value prop, but noted some holes in the direction and communication of the organization. I offered to conduct a strategy session for the leadership team. They accepted. The strategy session helped galvanize the vision of the organization and laid the foundation for strategy and the plan of action.
Once the company was marching in the same direction, I began facilitating introductions through my network. One of these introductions is turning out to be a massive opportunity that should catapult the earnings of this company dramatically. The partnership proved valuable to the company I sit on the board of and the introduction I made. They are launching their program this quarter and the sky is the limit for both parties.
Board of Advisors Formulation and Expectations
Formulating a board of advisors does not need to be an overly formal process as it is with a board of directors. An executive team can select one or more individuals of whom the executives feel would benefit the organization.
From there, the executive team will need to decide what type of compensation it is willing to provide to its advisors. This commonly is done in either cash, equity, or both. In some cases, equity can be based on parameters agreed upon by the two parties. I have equity arrangements from board roles that include initial grants and merit-based equity.
Once the board is identified, and compensation is set, meeting frequency should be determined. While an executive team can call on a board member when they are in need, it is advisable to establish a meeting frequency so that all advisory board members may be present. The most common frequency used is quarterly.
The executive team should be cognizant to make sure that the time the board spends with the team is commensurate with the compensation. In other words, don’t pay peanuts and expect full time participation. Conversely, don’t pay a fortune for someone you barely communicate with. Find the balance.
Conclusion
Every company does not necessarily need a board of advisors. However, if you want to grow your company, and put every effort to do it right the first time, a board of advisors may be a valuable option. It may also be a less expensive option than hiring outside consultants on a continual basis. If you already know everything, you don’t need a board of advisors. If you are human like the rest of us, a board of advisors with worth considering.
Author
Rob Comeau is the CEO of Business Resource Center, Inc., a business consulting and M&A advisory firm to the PEO industry. Rob is also the Founder and featured Author of this online publication NPG. Rob serves in board capacities within the business services, tech, and insurance industries.