Turning to Outside Advisers Can Bring Fresh Ideas

By Jim Jordan

Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP.

Companies without a board of directors including "outsiders" may be at a disadvantage. An advisory board of directors may offer a profitable solution.

The majority of construction companies in Texas are privately held, with a large percentage having all shareholders members of the same family. Shareholders, whether family members or not, fill most if not all senior management positions and seats on the board of directors. While many such contractors are profitable, there is a larger group that should be earning higher profits. This could be due to the fact that they do not have the benefit of a board of directors composed of outsiders. These companies do not have the opportunity to hear the opinions of others about their business. A remedy for the situation is to create an advisory board of directors.

When it comes to operating a business, there is no such thing as too many advisers -- especially when those advisers truly have knowledge. Unfortunately, too many privately held businesses don't understand this.

An advisory board of directors is a collection of professionals who may or may not be business associates but are not family members. The concept began as far back as the 19th century. President Andrew Jackson met regularly with an unofficial, intimate group of advisers that came to be known as the "Kitchen Cabinet.'' This group included only two members of his official cabinet, while the rest were people from various walks of life with different perspectives. Such kitchen cabinets are just as valid today and offer benefits to private construction companies. And like Jackson's kitchen gatherings, they don't have to be formal.

Unlike a public company's board, a private company's advisory board can operate without any formal rules. To be fair, there should be basic ground rules. For example, the group should meet on a regular basis - say, once every quarter - and should convene for the same two or three hours. Advisers shouldn't be required to remain on the board a long time but should commit for a fixed period. Advisers typically serve at least a year.

Regardless of service time, advisory directors offer advantages over strictly family dominated boards. Outside advisers do not have to recognize family politics, ambitions or rivalries. They don't have to take family history into account when offering critical advice. And they bring fresh ideas and new approaches to problem solving. Most of the time these advisers function more like consultants offering advice and support on a wide range of issues affecting the company.

It's important that members have more than just a passing knowledge of the construction industry. They don't need to be contractors, but they must understand the industry's dynamics. The best composition of a board would include a banker, bonding agent, CPA and lawyer who have worked in the industry. Other professionals may be beneficial such as marketing and human resources. Finding advisers isn't difficult: If an owner doesn't already have a relationship with these professionals, he or she can ask around to find CPAs, bankers and others who would be willing to serve. Many such professionals are more than happy to come aboard because it gives them the opportunity to network with others who may eventually need their professional services.

Although advisers are not always paid, owners should try to pay something. It doesn't have to be a lot, however, because advisers do not serve the same fiduciary role as trustees serving on the boards of public companies.

When does a privately owned company know when it's time to go outside and create an advisory board? The fact is, it's always time to have such a board, but it's especially crucial when a company is losing market share, losing money and/or seeing its volume of work decline. Of course, by then it could be too late. That's why the most forward-thinking private companies develop an advisory board before such events begin. These companies understand that professionals can help them anticipate local, regional and international economic challenges looming on the horizon and help them prepare for those challenges.

Toward that end, it's important to remember that advisers should not have to operate in a vacuum. Once they agree to serve on the board, they should be able to meet with the CEO, CFO, COO - all key decision makers. Information should not be kept from advisers.

Owners have a responsibility to listen to advisers. Simply having an advisory board may bring a higher level of prestige, but prestige alone doesn't improve profits. Owners must truly listen to their advisers' suggestions and be willing to enact the most logical of suggested changes. The owner is not giving up control, but using those ideas he or she feels are best.