We were recently introduced to a prominent financial institution that needed our help with their advisory boards and the process that they were dealing with illustrates some of the pitfalls associated with building an advisory board incorrectly. We were asked to do an assessment of their processes and the effectiveness of their boards. We interviewed many of the board members and one of their Presidents tasked with running the board at length and got an inside look at their processes in adding board members and managing the board process. This case study is a real life example of how overlooking something that may seem like a minor detail could be detrimental to the objectives that the board and organization are trying to achieve. This institution was proud to claim that the advisory board methodology was one of the pillars of their growth strategy. So much so that they had multiple advisory boards one for each office made up of business leaders in those communities. What we found was not that unusual and many of these issues are common factors that we often find in non-performing boards.

The first major issue was that the senior executives never put the time into designing the process of how they were going to build the board or realized how much work it would be to manage the board effectively before they built it. By analyzing up front whether you have the ability, process, experience and time to manage something like this you will realize whether or not you should even build a board and if so how it is going to be done. By simply doing this upfront analysis and planning you can increase the chances that the board will be a success and reduce the risk of failure. A failure at this level can be a huge detriment to your organizations long term goals and strategy.

As with many of the boards ABA has been asked to evaluate there was a complete failure in the process of bringing on perspective board members. First and foremost there were no concrete needs that were assessed. Instead it was more of choosing people based on their status in the community or resume as opposed to really understanding what value they delivered to the board and the objectives of the organization. This case as in many others, we saw very little time spent analyzing what information was needed to help the company as opposed to the name recognition of the individual. What they had built was a group of prominent individuals which were providing little value to the organizations growth in the business model. We have yet to find an organization that builds boards to ABA's stringent standards utilizing a ranking system to ensure success and reduce the chances of failure.

What was even worse is that since they had little clarification on what they needed they had little idea around how big they wanted the board. Thus we know of one very prominent business leader who was asked to join the advisory board and then told that they did not need him because they only had 2 spots open for one of the boards and had already asked two others who accepted. This kind of minor mistake can have a major impact on the growth of your board and in the worst case scenario on your organization. In a small business community like Colorado this type of blunder can be compounded by an insulted business leader who is out in the community communicating the unprofessionalism of the organization to his or her contacts.

Beyond the process of adding board members was the structure of the boards. In this case they had multiple boards with no standardized process of building or managing the boards. Not only is there no commonality in adding potential board members, each board is run differently with some being highly functional and some providing very little value if any. The boards are facilitated by different Branch Vice Presidents with different outcomes and many of the presidents not really knowing how to manage a board at this level. This lack of good facilitation led to boards being run more by the members than by the individual tasked to make the board effective for the organization. This oversight lead to a very critical issue that very few involved realized. The board began asking for, receiving and commenting on financials, tactical and governance issues. At best this was an oversight that prohibited the board from dealing with the strategic issues that most advisory boards are supposed to deal with. At the worst they were opening themselves up to tremendous amount of liability by commenting on those things best handled and designed for a Board of Governance. Proper facilitation of these board meetings is critical to ensure that you do not lose control of the meetings, that liability and conflicts of interest are kept in check and that the organization and advisors are continually getting value from the information conveyed in the meeting.

Compensation was the other real issue with this organization and the way they had it structured should speak to the multiple conflicts of interest that are present if this is done incorrectly. To join this board you actually had to "buy in" or invest in the organization. We are a big believer in providing stock to your advisors however we recommend that if you require your advisors to "buy in" then give them some sort of preferred return or dividend. We suggested that they provide a phantom stock program that would be more of a grant assuming the board members and the board as whole hit certain performance metrics. This would ensure participation, engagement and provide a metric for tracking how your board members were performing. It would also reduce any potential conflicts of interest being a direct investor in the company. Beyond the stock they had a complicated stipend formula where a board member would apply for a loan from the organization which was never repaid and this constituted your payment for board participation. Even worse they required that every board member also bring all of their accounts to the institution. As if all of that was not bad enough when asked for the document that let a potential board member know all of this it was a one page document that was poorly worded and did not explain nearly half of this information along with a horrible black and white copy of a tri-fold marketing piece. It did not explain how much time was required and since there was no thought given to what was needed from a board member there was very little that spoke to expectations of being a board member. Completely unprofessional, uninformative and a seemingly back handed way of raising money.

This compensation structure other than seeming to be a really complicated and a poor way of getting engagement provided so many issues around conflicts. For example if a board member was not performing are you really going to be able to fire them? How would you know they were not performing if there were little if any expectations communicated to them up front? At best you might have an angry client that will pull their accounts from the institution and the worst case scenario is that you now have a very angry shareholder. At the level at which we build these boards true buy in comes from board participation not how much stock they own or how much you are paying them. Since the comp structure is secondary it needs to be easily calculable to ensure proper payment and eliminate the conflicts.

In the end this is a perfect case study of how not to develop a board and the reasons why. While it may seem like overkill, thinking of a board with this kind of detail before you build it could be all the difference between a board that is helpful to your organizations growth or one that is a detriment to that growth.

Bob Arciniaga
Managing Partner
Advisory Board Architects