Advisory Boards Can Add Value to Closely Held Construction Firms

Lund explains the advantages advisory directors offer over family- dominated boards.

By Mark Lund

Although many closely held contracting companies are successful, they could become even more so if willing to step outside the family circle and seek advice from outsiders. The majority of construction companies in Texas are privately held. At many of these family-owned businesses, relatives hold many of the significant decision-making positions. It isn’t uncommon for family members to hold all senior management positions and seats on the board of directors. Sometimes such loyalty can get in the way of higher profits.

Mark Lund, CPA, CCIFP, partner-in-charge of construction industry services at the Houston office of Weaver and Tidwell (weaverandtidwell.com).

When one examines the nation’s best contracting companies – including some closely held companies – it is clear that a different mindset is at work. The push is always on to stockpile ideas from non-family businessmen and women. That’s because these contractors have learned that the perspective and opinions of others can point the way to higher profits.

The way successful contractors seek outside guidance can vary. However, one of the most effective and time-tested ways is through an advisory board of directors. In establishing such a board, company owners are acknowledging that managing a business in a rapidly changing environment requires an ability to recognize when change is needed. Forward-thinking owners realize their workdays are monopolized by day-to-day operations and existing strategic considerations. Little time is left for creative thinking. And since other family members in management positions often defer long-term decision-making responsibilities to the most senior family member, they are not always in a position to provide creative input. That’s where having an advisory board of directors with a variety of knowledge and experience can add value.

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 when President Andrew Jackson met regularly with an unofficial, intimate group of advisers that came to be known as his “Kitchen Cabinet.’’ Such advisers are just as valid today. Like Jackson’s gatherings, they don’t have to be formal.

There should be some basic ground rules, however. The group should meet on a regular basis – say, once a 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. Owners should keep the composition of the board diverse to provide for a variety of thoughts and suggestions.

Advisory directors offer important 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. They bring fresh ideas and new approaches to problem solving. Most often, advisers function like consultants offering advice and support on a wide range of issues.

It is helpful if board members have some knowledge of the construction industry to minimize the learning curve. However, candidates shouldn’t be excluded just because they have never worked with a contractor. Remember, you are looking for new ideas. Complementary industries such as real estate development and banking can provide insight not readily available inside the company. The best advisers tend to be individuals with years of experience who have run successful companies.

The board should not include the company’s regular bonding agent, accountant and attorney. Owners instead might look for assistance from professionals such as marketing directors, technology specialists and human resources consultants. Also, it might be beneficial to consider an economics professor from the neighboring college. Owners may consider utilizing retired executives from other industries who have dealt with labor issues, rising material costs or who have managed a business through a recession. Finding the right mix of advisers may take effort, but the benefits will outweigh the time it takes to assemble the group.

Although advisers are not always paid, it often makes sense to compensate them. It demonstrates the company’s commitment to the position and is likely to bring out greater effort from all involved. Because private company advisers do not serve the same fiduciary role as individuals serving on the board of a public company, the compensation would obviously be less.

How exactly 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. Whether growing rapidly and gaining market share, or facing declining revenues and a looming recession, an outside advisory board can bring a perspective not found within the family group. Most forward-thinking private companies develop an advisory board before negative events begin; they understand that advisors can help them anticipate and prepare for changing economic conditions.

Toward that end, it’s important to remember that advisers should not operate in a vacuum. Once they agree to serve on the board, advisers should be able to meet with the CEO, COO and CFO on a periodic basis if needed. These key decision-makers within the company can provide valuable information and insight that will assist the advisory board members in their roles.

It’s important to remember that 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 consider and evaluate the most logical of suggested changes. The owner is not giving up control, but instead is adding a valuable resource to the company.