Overview

The inherent flexibility of advisory boards means the structure can be adapted to support a variety of business priorities.  The most effective advisory boards are built upon a robust and well considered best practice foundation, then tailored to fit the particular needs or use case of the organisation.  In this series, we explore the various use cases of advisory boards and key considerations for implementation and facilitation.

Each situation is unique and the information provided is general in nature.  If you are looking to implement an advisory board for the first time, or are searching for support to enhance the effectiveness of your existing advisory structure or governance system, we strongly recommend engaging the support of a Certified Chair™️ .  Our tailored Advisory+ service can help connect you with the right advice for your organisation.

WHAT IS AN ADVISORY BOARD?

Advisory boards are a structured collaborative method for organisations to engage external advisors. The structure, role and operation of an advisory board is influenced by the organisation’s:

• Operating environment
• Legal requirements
• Strategic direction
• Leadership system
• Available resources
• Capacity and capability
• Regulatory environment

How can advisory boards support InVESTMENT STEWARDSHIP?

In 2021, the OECD¹ highlighted that institutional investors owned 43% of global market capitalisation of listed companies. This has implications for corporate governance in regard to investment, ethics in concentration of ownership, cross border investment protocols and good stewardship of other peoples’ money just to name a few.

Advisory board structures, such as Responsible Investment Committees, are utilised within these governance systems to support and fulfil quality investment stewardship activities.

Dr. Michael Drew, an expert in investment governance and stewardship, calls attention to the value of advisory boards for institutional investors. He emphasises the importance of alignment between investors and investees in a complex and expanding investment landscape. Dr. Drew posits that in governance systems well-structured advisory boards can provide assurance, transparency, and independent advice to facilitate sound investment decisions, including consideration of the power of voting rights.

Recognising the significance of ethics and best practices in advisory board governance, Dr. Drew suggests that modern best practice involves maintaining active and current advisory boards with clear roles and duties throughout the investment cycle. He concludes by emphasising the value of advisory boards in providing multiple lines of defence and aligning the investment process with the benefit of beneficiaries.

This is a view shared by Diane Seymour-Williams ; Partner at Acorn Capital Advisors. In a recent interview² with Robert Moore, Director – UK, Jersey Finance, the significance of Investment Committees was explored in stewardship for Family Office wealth. “An experienced, well-resourced investment committee adds value by strengthening governance to protect and enhance a family’s wealth. Creating a transparent governance structure removes any ambiguities around responsibilities and the degree of discretion delegated to investment managers.”

Organisational CONSIDERATIONS

When evaluating the role of an advisory board within a governance system, leaders can look to their advisory structure to augment the governance decision making cycles.  To do this, the structure needs to be carefully considered including:

• Current decision-making models within the organisation
• Evaluation of how decisions are being informed
• Governance and systems alignment
• Ethics considerations in the function of independence
• Effectiveness of stakeholder engagement and confidence

Advisory Structure – BEST PRACTICE CONSIDERATIONS

The ABF101 Advisory Board Best Practice Framework highlights key organisational considerations aligned to the best practice principles.  While all options need to be carefully considered for a particular use case and operating environment, the following list provides a starting point for your discussions:

1. Advisory board structure options and timing
2. Purpose and intended impact
3. Investment and return
4. Roles and selection
5. Impact measurement

REFERENCES

¹ Fukami, K., D. Blume and C. Magnusson (2022), “Institutional investors and stewardship”, OECD Corporate Governance Working Papers, No. 25, OECD Publishing, Paris

² https://www.jerseyfinance.je/our-work/family-office-feature-in-conversation-with-diane-seymour-williams/

CASE STORY

The following is an extract of Dr. Michael Drew’s thought leadership in evaluating the role and impact of advisory structures within governance systems to enhance investment stewardship.

Dr Drew is a trusted advisor to family offices, foundations, and fiduciary investors. A financial economist by training, Michael is a Co-founder of Drew, Walk & Co. and a Professor of Finance at Griffith University. He has held previous academic appointments at the ANU and QUT, and senior industry appointments with JB Were & Son, Myer Family Company, Ord Minnett, QSuper, QIC, and Wilson HTM. Michael’s research has appeared in leading practitioner journals, including the Financial Analysts Journal and the Journal of Portfolio Management. Dr Drew is a regular media commentator and consultant on investment-related matters and has authored over 90 scholarly papers.

Michael serves as a Trustee Director and Chair of the Investment Committee at CareSuper, a member of the Investment Advisory Board of the Petroleum Fund of Timor-Leste, and a Trustee of Mary Aikenhead Ministries. Michael is a Board Member at Jobs Queensland and serves as an investment committee member of Aboriginal Hostels Limited and the Public Trustee of Queensland. Dr Drew is Chair of Volunteering Australia and St Vincent’s Foundation Queensland, Advisor on the Best Practice and Ethics Advisory Board for Advisory Board Centre and is a former Trustee Director of QSuper and former Advisor to the Investment Committee of the Australian Retirement Trust. He received his PhD in the field of economics from the University of Queensland, is an Accredited Investment Fiduciary Analyst™, a Fellow of the Australian Institute of Company Directors, and Life Member of FINSIA. Michael’s latest book, “Investment Governance for Fiduciaries” was coauthored with Dr Adam Walk.

How do we, in a world which is complex, where the range of investment opportunities continues to grow, particularly in private markets- how do we get assurance and lines of defence for both the investor and the investee to ensure there’s this alignment, which is so critically important for successful investing?

The Role of Advisory Boards & Investment

I think the great challenge is that large asset owners have to exercise their ownership rights, and they have to do this in a way that delivers long-term investment value for the beneficiaries they serve. So there’s these chains of principles and agents and how do we in the global investment sphere get those behaviours align? That’s really the key to success.

Where I’ve seen the rise and rise of advisory boards is how they work, particularly in private markets such as venture capital or private equity. And they are great assistance to the general partners when they’re establishing private capital funds that really have to be patient in nature. As we’ve seen, it takes time to deploy and nurture and realize value in a venture seed or even later in the cycle private equity program. And we need to be able to have a governance framework that works through the cycle.

And I think one of the great learnings in the 2020’s in this space is the stresses of events including the pandemic, is that a limited partner advisory board can also be a timely source of advice regarding everything from valuations and management of conflicts of interest, real and perceived. I’ve certainly seen the use of advisory boards by both the general partners and limited partners as a signal of governance best practice to the investors. And today, that includes not just the traditional large asset owners, but also family offices and impact investors who seek an investment process that’s both well supported by traditional fiduciary boards, but also has a clear and key role for advisory boards as a source of expertise from economic investment, legal risk. And it does assist in the way in which we give this confidence in a world of information asymmetry to the investor.

Why Best Practice in Advisory Boards Matter

One of the great challenges every day for public markets, but particularly for private markets, is this transparency and if you will, the moral hazard of how people behave. And we can’t perfectly observe them. So matters of ethics and alignment, as you just said, are critical. And I think today’s investors are trying to provide a framework where they can seek assurance that the investment process gets the right information to the right people at the right time. So advisory boards in my world are accretive to the process they add to transparency, but one of their great value adds the ability to provide independent and timely advice and insight when it’s most needed.

Modern Best Practice Cut Through

I think the history of advisory boards has perhaps been project-based, where I think modern best practice really cutting edge has advisory boards that are ongoing and have very clear roles and duties in the investment cycle.

One of the great challenges we face the moment is the cost of funds is much higher today than it was a couple of years ago. And again, advisory boards can provide insight, perhaps a fresh perspective, and assist those who are stewarding the money and have duties to beneficiaries to demonstrate that there are multiple lines of defence around the monies deployed. And that beneficiaries can, I suppose, sleep well at night knowing that the investment process is aligned to their benefit as it should be.