Do You Need an Advisory Board?
We all know how valuable external input from trusted advisors can be for our business. But what does that look like for independent agencies who don’t have investors to answer to?
Links
“Do Independent Firms Need A Board?” by David C. Baker for punctuation.com
Transcript
Blair Enns: David, our topic today, your topic on which I will interview you is a board of advisors. You've written a post on this, but before we get into it, I didn't look this up. What is the 13th Amendment? What is the 13th Amendment? Marcus is going to keep all those takes in, to the US Constitution. I know what the 14th is because there was just the Supreme Court ruling on something to do with the 14th Amendment. What is the 13th?
David C. Baker: Slavery.
Blair: Oh, really?
David: Yes.
Blair: The 13th Amendment outlawed slavery.
David: Yes. This is so surprising that you didn't know that.
Blair: Being a Canadian, you're surprised that I haven't memorized the US Constitution. The reason I referenced the 13th Amendment is you have a line in here. The subject is a board of advisors. It begs the question, does an independent creative firm, ad agency, design firm, et cetera, do they need a board of advisors, a board of directors? What you do in this piece is you go quite deep into the history of boards of directors and the role of a board. I found it fascinating.
You start this piece by asking, what are the forces that influence the principal's behavior? The answers are really revealing. As an owner of an independent creative firm, you don't have a boss. You don't have one big boss. You make that point. You also say, well, you do have these other sorts of bosses. One of them is free market labor where your employees are, in some small way, your bosses. That's your reference to the 13th Amendment. Do you want to start there?
David: Yes.
Blair: Who's protecting the firm from you?
David: That's the question. In a publicly traded company, you've got a board, and they can fire you. You don't have that in a small independent firm, which you love, but it also means that there's a lot of small independent firms that really aren't doing all that well because some of these things haven't caught up with them. What are the consequences if you don't do a good job leading your firm? One is your employees can just leave you, and that happens.
I'm surprised that more employees don't leave. The only reason they don't leave more often is because it's hard to find another job sometimes. The ones who leave a lot are the ones that leave to go start another job because they think they can be a better boss than you are. Then all the clients, too. This one's hilarious to me because you think, "Okay, I can't have a boss. I've got to get out of this job that I'm in." Then you discover now, instead of one boss, you've got a dozen bosses, each one of your clients.
Blair: Sucker. Yes.
David: Investors, there aren't many of those investors in this space, but if there are investors, and I've worked with maybe 20 firms that do have investors that don't participate in the daily operation of the place, they will have something to say to you, especially if the results aren't great. Then partners sometimes, right?
Blair: Yes. I was going to say on partners because I'd skipped over that one. These are all forces on your behavior. I love the way you framed it. These are the people protecting the firm from you. I often think about myself and my business. Who's saving when without pitching from Blair?
David: They've all left. I'm fond of saying this business has been very good to me, but I haven't been good to it. Maybe I needed a board of advisors.
Blair: Take us back in time a little bit and talk about the role of investors up until the current day of the role of board of directors, because it took a long time for the incentives to be properly aligned when it comes to boards and board members and management, didn't it?
David: It really did. In fact, some of the best movies out there, they cover those periods when those incentives were not aligned. I find this just captivating to think about. If you go all the way back to the beginning, the boards were comprised of the people who provided the capital for the business. "Hey, I've got money. You go start a business. You've got a great idea. Now, I'm going to stay in touch. I'm going to give you some counsel around that."
These businesses became so big that private funding-- this was the second stage. Private funding just wasn't big enough to keep these businesses rolling. That's when funding from the public markets came along. Now, though, there's lots of little shareholders, and they don't really have any power like the private shareholders, the funders of these businesses, had in the past. We have all these little shareholders with no power, like, what's going to keep this company from misusing the investment that millions of us have made? They decided to change. It wasn't the investors now on the boards. It was just like, who are my friends? This was very predictable. This turned out to be bad because these friends on the boards just let the runners of these businesses get away with all kinds of bad things. The checks and balances that swung the pendulum back was the takeover market. If your stock doesn't start improving, then we're going to buy a bunch of it up, and then we're going to insist on changes. We're going to get seats on the board and so on.
In response to that, as the pendulum swung all the way back, was poison pill, takeover, protection kind of stuff. That was the last phase before we got institutional advisors that said, "Okay, there has to be some standards here." That's when the National Association of Corporate Directors stepped in and said, "All right, the ultimate responsibility for this company is not the CEO and the president, it's the board." The board exists to do one thing, and that's to protect the shareholders. You and me, the millions of people that buy stock on the publicly traded markets.
That's not true if we take this back to private companies because they don't have shareholders. They are the shareholders. We have this problem of how do we protect the company from bad decisions that the main and only shareholder is making? That's where we find ourselves today. It's like maybe it's a partner. Maybe if you're really bad, your team's going to leave you, your clients might leave you, and so on.
It's just an interesting problem to me to think about this unique situation. We have little kingdoms without many checks and balances. There are some checks and balances, but not like a publicly traded market.
Blair: I have to confess, the first few times I encountered clients of mine-- this is going back many years ago now, where they were independent creative firms on the smaller side, so less than 50 employees, sometimes less than 25 employees, that had boards of advisors, I gave that a little bit of an eye roll. I thought, "Oh, this is like somebody playing at business, kids pretending to run a big business." As the years went by and some of my stupidity was shed from me, I began to see the role of said advisors.
Now, tangential question. Have you ever found yourself in a sales conversation with somebody who is considering hiring you? They chose not to hire you. They went away, decided to think about it, and then they came back with a request for you to serve on their board of advisors?
David: Yes, that has happened. I've done it in a few cases. I don't do it for free anymore. I did it for free on a couple of occasions. That's where I find myself wanting to do more work, honestly. I don't know what the percentage is, but probably somewhere between 5% and 10% of the kinds of firms that you and I serve have an informal board of advisors, not a very formal one.
I found that that usually is better for the business. It's usually staffed with pretty decent people. The mistake is not formalizing it and not necessarily getting all the right people. It's somebody that retired because they owned a life insurance agency in the neighborhood and didn't necessarily run a firm like this, or it's a really big firm that somebody ran and now they're serving on the board, and the stuff that they might recommend is not all that applicable.
I really think there's room for more advice in this field. By that, I mean on boards, advisory boards. Fortunately, we are pretty open. I think we're pretty open, aren't we? Or are we not that open? I don't know. I think we're pretty open.
Blair: What way? We as an industry?
David: We as an industry. We're pretty open about the strengths and weaknesses we have, and we learn from each other. Some of that learning from each other is just dragging us all down to the median. I don't know.
Blair: Yes. I realized the first part of what you're saying there. You and I might be doing this wrong because neither you nor I have formal board of advisors, but you've pointed out one way to do this is to be in a little-- I forget what you call it, but a little collaborative group. You and I have one, and to a lesser extent, another friend where our businesses are pretty much open book to each other. We do try to hold each other accountable. Now, I hide the really, really dangerous stuff from you, the things that you would never, in a moment, put up with.
David: I know. I don't see the real financials.
Blair: You don't have an audit lately.
David: No [laughs].
Blair: I've faked my financials for the last 20 years.
David: Yes, but I'm going to be spending a little bit of time in Tuscany, and your wife is going to be there. I plan to pull her aside and get some real financials from her.
Blair: Yes, good luck with that. Although on the subject of financials, she's happy to share everything. Especially, she loves to share bad news.
David: We've done this with other people too. You remember we had several people together in Chicago a couple of years ago. One of them was April Dunford. People that are running businesses that we really respect, and I'd like to know how she does that. How do you think about pricing and packaging your services, and what's your new business? I'm very curious and eager to learn, so I'm not afraid of any of that sort of information. This is something that's missing in our field. We don't have enough formal boards of advisors for small independent firms, and I think we would benefit by having those.
Blair: Do you want to talk about what a good board would look like and what you would ask that board to do for you?
David: I would ask them about what my role should be in the firm. That would be a big one.
Blair: Say more about that. What do you mean?
David: What I should be doing. If I'm running an agency and I want to have an advisory board, one of the big questions I would ask them is, what do you think I should be doing in this firm, and what should I not be doing in this firm? Because that's one thing that people really get wrong. Does that make sense?
Blair: Yes. I'm just internalizing this for a minute.
David: It makes sense.
Blair: You know the rest. The other would be a business strategy. We talk about positioning, which is really about business strategy. What business should we be in, and with an eye towards the future and how this is changing and so on?
David: I would want my board to have direct access to my direct reports without it being filtered through me. I would want them to be able to hear from those people how ethically, how I'm leading them, how honest I am. Am I giving them my attention? I wouldn't want all the information that goes to the board to be mediated through me. I'd want them to have access to those people so that they could go around me and say something that needs to be said to an advisor that I would then be duty-bound to listen to more carefully. Finance? I don't think that's the big one. I think we're decent enough on that front.
Succession and M&A planning, that would be a really big one. I don't think we consider the next stage of our businesses until it's a little bit too late. I would want us-- you've said something, and I've said something that are opposite that are both really fun to think about. One is, what would I need to change if I could never sell this business? That was something you said. Then I flipped it around and said, what would I change if I had to sell my business within a certain period of time? Both of those perspectives should be built into the advice that we are given running a firm.
Something about risk management, that's one of the biggest areas that a public board of directors does for a publicly traded corporation. We don't think about that much. We don't think about it enough.
Blair: Are you talking about capital allocation or something else? What other forms of risk?
David: Something else. I lose my mind, or I die suddenly, or my head of sales, who's really good at it, all of a sudden leaves, or the market that I'm in-- we have a pandemic, and now I'm focused on travel and tourism. Now what do I do? We don't think about risk management enough until we're right in the middle of it. That's one thing that a board would help you with.
Blair: I'm now accepting applications for a win-without-pitching board of advisors.
David: How much is the pay? I'll bet it's nothing.
Blair: The fee is $50,000 a year.
David: Oh, the fee?
Blair: Yes.
David: People are going to pay to be this close to you in life. Right.
Blair: If there's a way to make money off of this, I will. Those are all really great points. As you're going through the list, I'm thinking, "Oh, yes, this makes so much sense. I love that you said, maybe you didn't say it this way, but the financial analysis, financial performance, that's actually the easy part. I wanted to ask you, how big should a board of advisors be? Would you want at least one of those people to be beyond financially literate, maybe financially astute?
David: It depends on the size of the firm. If you're a bigger firm, then you probably need somebody with financial chops on the board. I would think your board needs to have at least two people on it. I'm talking about not including you, so you plus at least two, no more than four. If you're a big enough firm, you need to pay them something. $20,000, $30,000, $40,000 a year. With very specific expectations, you have a right to expect specific things for that money that you're paying them. If it's a much larger company, then they might need to be incentivized if a sale happens too, if that's one of your big goals, I would say.
Blair: Right. The reason I asked if you'd ever been approached by somebody who considered hiring you and chose not to be on their board of advisors is it happens to me about once a year where it's like, "Yes, we're not going to pay you $50,000 for that thing that we're talking about, but would you be on our board of advisors for $2,500 a year?" There's an easy answer to that question.
David: Yes, the answer is no.
Blair: Yes. At the right remuneration level, I don't think that would work for me, but I could see you, if you ever chose to ease into semi-retirement, it would probably make sense for somebody like you, who you've seen inside well over 1,000 firms. It'd be great to have you on.
David: Yes. I'd like to do more of it, honestly, not as a way to get less expensive consulting or daily coaching, but if somebody really wanted to tap into how I think and the directness, then I think that would be fun. I've been on quite a few boards, both associations, one publicly traded company, really enjoyed the process each time, so I would be open to that. I think people generally-- this isn't about me. I think you ought to be open to formalizing a board and putting the right people on it, maybe paying them if you need to, if you'll get better, work out of them and seeing what it can do for your company.
Blair: All right. I'll send the paperwork over shortly. Thanks for this, David.
David: Thanks, Blair.
