IVEntrepreneurshipGuide
Advisory Boards for Mid-Sized Firms: When They Pay Off, Whom to Appoint
An advisory board can give an owner what is often missing in their own business: disagreement among equals. Whether it does depends less on well-known names than on how openly the owner deals with it.
Key takeaways
- An advisory board (Beirat in German) is a voluntary body that advises management and, depending on its design, also oversees it. In the German Mittelstand, the advisory form prevails.
- Outside members do not help automatically. A study of 561 Belgian SMEs shows: they only have an effect if the owner discloses firm-specific information and the board meets regularly.
- An advisory board pays off above all in transitions: growth beyond the owner's role, succession, new shareholders joining, major investments.
- Staffing follows the gaps of the business, not the circle of acquaintances. Three members with clearly different profiles are usually enough to start.
Who still disagrees with you?
In an owner-managed business there is rarely anyone who disagrees with the owner as an equal. Employees are dependent, consultants are paid for a task, family and friends mean well. Many important decisions are therefore made alone, often in the evening and under time pressure.
An advisory board is meant to close this gap. At the same time, many owners hesitate because they would have to give up control, fear the costs, or do not know whom to ask. This guide therefore answers one question: When does an advisory board pay off for a small or mid-sized business, and how do you set it up so that it actually has an effect?
To answer it, I first clarify what an advisory board is and which two tasks it can have. Then I show what studies say about its effect and derive a check and a staffing guide from that. This article is not legal advice. How an advisory board is anchored in the articles of association is something to settle with your lawyer or notary.
What is an advisory board, and how does it differ from a supervisory board?
An advisory board is a body that advises management and, if the shareholders so wish, must review or approve certain decisions. Unlike the supervisory board of a German stock corporation (AG), it is usually voluntary in a GmbH (the German limited liability company) or a partnership. Its rights therefore derive from what is laid down in the articles of association or in rules of procedure.
One distinction matters in practice. An advisory-only board makes recommendations; the decision stays with management and shareholders. A board with oversight rights must approve certain transactions, such as large investments, loans, or the appointment of managing directors. There are many hybrid forms in between.
| Feature | Advisory-only board | Board with oversight rights |
|---|---|---|
| Task | Advice, second opinion, contacts | Approval of specified transactions, monitoring |
| Basis | Rules of procedure or agreement | Articles of association |
| Typical occasion | Growth, strategy questions, new markets | Several shareholders, succession, external managing director |
| Members' responsibility | Low, since no decision | Higher, since co-decision |
| Risk | Becomes a discussion group without consequences | Slows decisions down |
The thinking model: controller or resource?
Two well-known theories explain differently why an advisory board has an effect. Principal-agent theory describes the relationship between an owner (the principal) and a manager (the agent) who knows more and may have interests of their own. From this perspective, a board is above all control: it is meant to prevent the agent from acting against the owners' interests.
Resource dependence theory sees the board differently. A company depends on resources it does not have itself: knowledge, contacts, access to money, reputation. From this perspective, an advisory board is a way of bringing such resources into the business. It complements more than it controls.
For an owner-managed business, the second view usually fits better, because owner and manager are often the same person. There is then nobody who needs protecting from the agent. In a review of 235 publications on family businesses, Siebels and zu Knyphausen-Aufseß (2012) conclude that no single theory adequately explains the specifics of such businesses. That applies here too. As soon as several shareholders are involved or a salaried managing director is appointed, the oversight task gains weight.
An everyday analogy: the advisory-only board is like an experienced mountain guide you take along on a difficult tour. They know routes and dangers, but the decision to turn back is made by the group. The board with oversight rights is more like the rope team that agrees together on the weather at which nobody goes any further.
An advisory board that only confirms costs money. An advisory board that disagrees costs effort and is usually the better deal.
What studies show about the effect of advisory boards
The obvious assumption is: outside members make a board better. Uhlaner, De Massis, Jorissen, and du (2021) tested this assumption on 561 small and mid-sized enterprises in Belgium. They mainly measured how strongly the board advises management on strategy and other high-level matters. The result contradicts the common expectation. Under certain conditions, the mere presence of outside members had no effect or even a negative effect on this advisory performance.
The authors see the reason in information. Outside members know little about the business. They can only advise well if management discloses firm-specific information. Precisely this happened less often when the family held the ownership majority and when the board met only rarely. Where information was disclosed, advisory performance was better, and through that it was indirectly associated with better business results.
For Germany there is a study by Woywode and Tänzler (2012) that analyzed the prevalence, composition, and tasks of supervisory and advisory boards in more than 500 mid-sized companies. Its focus was how family influence shapes the board's tasks. A survey of 320 owners and managers in Ghana (Musah and Padi 2022) found a positive association between the size and composition of the advisory board, disclosure of financial information, and business success. The study comes from a different economic environment and shows associations, not causes.
- Appoint outside members
- Regular meetings70% of previous stage
- Open information from the owner64% of previous stage
- Good advice on strategy78% of previous stage
- Better decisions in the business86% of previous stage
Worked example with freely chosen numbers for illustration: at every link of the chain, part of the possible impact is lost. The study itself does not give such shares.
When does an advisory board pay off? The Advisory Board Check
An advisory board is not a sign of size but a tool for certain situations. From the findings and the thinking model, one can derive situations in which it typically pays off and preconditions without which it achieves little. The more items you can tick, the more likely the board is worthwhile.
Occasions
- The business is growing beyond the owner's role, and you are looking for a sparring partner on strategy and organization.
- A succession is due within the next five to ten years.
- There are several shareholders or family branches with different interests.
- A salaried managing director is to be appointed.
- Large, hard-to-reverse decisions are pending, such as an acquisition, a new site, or a foreign market.
Preconditions
- You are willing to disclose figures, problems, and open questions in full.
- There is a minimum base of figures: monthly results, a liquidity forecast, a few key figures.
- You can prepare three to four meetings a year and take them seriously.
If the preconditions are missing, a single mentor is often the better first step. What mentoring can achieve is described in the article mentoring for business owners. How oversight and responsibility can be organized even without a board is shown in the article corporate governance for small businesses.
How do you staff an advisory board? Five steps
The most common weakness of advisory boards in mid-sized businesses is staffing from the circle of acquaintances: the tax advisor, a friendly fellow entrepreneur, a former banker. That is convenient, but it creates little independence and often the same view three times. The following steps start from the gaps of the business.
Define the purpose
Write down in two sentences what the advisory board is for and whether it only advises or must also approve. Without this purpose nobody can be chosen sensibly.
Name the gaps
Which experience is missing in management? Typical are financing, sales in new markets, leading larger teams, or experience with succession.
Derive profiles
Derive three different profiles from the gaps. At least one member should be independent, meaning neither a business partner nor a paid consultant of the company.
Approach candidates
Search specifically for the profiles through associations, chambers, and your own network. Have an open conversation with each candidate about expectations, time commitment, and compensation.
Agree on a trial year
Appoint the members initially for one to two years. After the first year, both sides check whether the collaboration works.
| Profile | Gap in the business | Where from | Independent? |
|---|---|---|---|
| Financing and figures | Investments, bank meetings, controlling | Former head of finance of a mid-sized company | Yes |
| Market and sales | New customer groups, pricing | Entrepreneur from a neighboring industry | Yes |
| Leadership and succession | Second management level, handover | Owner who has handed over a business personally | Yes |
Worked example
How does an advisory board work day to day?
The Belgian study showed that infrequent meetings reduce openness. It follows that rhythm matters more than the prominence of the members. In practice, a few rules have proven useful; adapt them to the size of your business.
- Rhythm: three to four meetings a year, plus one strategy meeting with more time.
- Documents: one week in advance, always in the same structure: figures, open decisions, problems, questions for the board.
- Agenda: at least half the time for questions about the future, not for the report on the last quarter.
- Minutes: record recommendations and decisions with the person responsible and a date.
- Confidentiality: agree on it in writing, as well as how to handle possible conflicts of interest.
- Review: once a year, the owner and the members jointly assess what the board has achieved.
Worked example. The report on the past should take up the smallest share of the time.
How to prepare high-stakes decisions so that the board can think along sensibly is described in the article deciding under uncertainty. If there are tensions among the shareholders, an advisory board only helps if its role has been clarified beforehand. The article conflicts among shareholders offers guidance on this.
Conclusion: when does an advisory board pay off?
We set out to ask an advisory board pays off for a small or mid-sized business and how it has an effect. The answer has two parts. It pays off in transitions in which management's experience is no longer sufficient or several interests have to be balanced: growth, succession, new shareholders, major investments. And it only has an effect if the owner discloses what is really happening in the business and if the board meets regularly.
The second is the harder part. An advisory board does not require giving up ownership, but it does require giving up interpretive authority. Whoever lacks that willingness should start with a single mentor. Whoever has it gets something that is hardly available inside one's own business.
What you can do this week
- Write down in two sentences what you would need an advisory board for.
- Work through the Advisory Board Check and count occasions and preconditions.
- Note the three biggest experience gaps in management.
- Talk to your lawyer or tax advisor about the appropriate form before you approach anyone.
A good advisory board does not make any decision easier. It makes it better founded.
Frequently asked questions
What is an advisory board in a GmbH?
An advisory board is a usually voluntary body that advises management and, depending on the articles of association, may also have oversight rights. Its tasks and rights derive from the articles of association or rules of procedure. The exact design should be reviewed legally.
At what size does an advisory board pay off?
There is no fixed size. More important than the headcount is the occasion, such as growth beyond the owner's role, an upcoming succession, several shareholders, or major investments. The precondition is a willingness to disclose figures and problems.
How many members should an advisory board have?
For small and mid-sized businesses, three members with clearly different profiles are a proven start. At least one should be independent, meaning neither a business partner nor a paid consultant. Larger boards are harder to run.
What is the difference between an advisory board and a supervisory board?
In Germany, the supervisory board is mandatory for stock corporations and, above certain sizes, for other companies too, and it has defined tasks. An advisory board is usually voluntary, and the shareholders determine its rights themselves. It can be advisory only or equipped with approval rights.
Do outside advisory board members really help?
A study of 561 Belgian SMEs shows that outside members only have an effect if the owner discloses firm-specific information and the board meets regularly. Without openness, their contribution remained neutral or was even negative.
Sources
- Uhlaner, L.; De Massis, A.; Jorissen, A.; du, Y. (2021): Are outside directors on the small and medium-sized enterprise board always beneficial? Disclosure of firm-specific information in board-management relations as the missing mechanism. Human Relations, 74(11), 1781-1819.
- Woywode, M.; Tänzler, J. (2012): Corporate Governance in geschlossenen Gesellschaften, insbesondere in Familienunternehmen, unter besonderer Berücksichtigung von Aufsichtsgremien [Corporate governance in closely held companies, especially family businesses, with particular regard to supervisory bodies]. Zeitschrift für Unternehmens- und Gesellschaftsrecht, 41(2/3), 418-445.
- Siebels, J.-F.; zu Knyphausen-Aufseß, D. (2012): A Review of Theory in Family Business Research: The Implications for Corporate Governance. International Journal of Management Reviews, 14(3), 280-304.
- Musah, A.; Padi, A. (2022): The influence of Corporate Governance Practices on Financial Performance of Small and Medium-Sized Enterprises in Ghana. The Indonesian Journal of Accounting Research, 25.
Note. This article is not legal or tax advice. The form, rights, liability, and compensation of an advisory board must be clarified case by case with a lawyer, notary, or tax advisor.
