Why boards are increasingly seeking the company of outside advisors

An outside consultant can bring the extra edge through specialised knowledge which the board may be lacking. (Representative Image)

The increasing complexities of the business environment – whether caused by the tectonic shifts in consumer attitudes, pandemics, global trade barriers or political turmoil – are forcing enterprise boards to seek subject-matter experts as external advisors.

An outside consultant or advisor will be beneficial to the ‘grey-haired’ board in terms of specific knowledge that is not available within at the moment, especially as we have seen in recent times in matters related to cybersecurity or employee welfare.

Such outside advisors can also act as arbitrators in conflict resolution between directors and counsel them on issues related to specific subjects. In addition, they can be a voice of the minority stakeholders without executive power.

The compulsion to raise the professionalism of boards in meeting the demands they face prompted the proliferation of such advisors and advisory services globally.

The services include board recruitments and evaluation, board procedures, better information and controls.

Making boards into working corporate bodies is another element. Hiring outside advisors becomes essential from that perspective as well. This is most often seen at the board committee level, with compensation committees hiring pay and benefits consultants, nomination/governance committees tapping search firms and governance advisors, or audit and finance advisors.

The full board can hire outside consultants, such as its own legal counsel on M&A, or when a sticky legal matter arises. This not only expands the board’s capabilities and professionalism, but also shows regulators, investors and hostile attorneys that it is doing a proactive, professional governance job. But what are the dos and don’ts for boards contracting outside expertise?

The dos and don’ts

Authorisation is first, and is a must. If the board isn’t empowered to appoint and pay for consultants, you’ve committed a legal no-no from the start. The charter/by-laws of the board as a whole, and for individual committees, should empower the board to contract outside advisors as they deem fit in performing their governance role.

When the committee or board contracts with this advisory, the minutes should show the discussion on why it is needed, with a formal resolution of approval. Though it may be too late at this stage, the smart corporation will have researched a list of vetted sources for advice in advance.

Setting a specific budget for such outside advisor engagement likely won’t work well. The expense for a simple legal opinion will be far different from the bill for a forensic audit. It is best to budget for overall board line items with some funding to expend as needed, and require a board resolution for big-ticket items. If you worry that your board could run up extravagant legal and consultant fees, maybe it is time for a set of new directors.

Outside advisors should be properly briefed

The outside advisors need a proper briefing on what is sought. What specific deliverables are sought? What’s the budget (and is it hourly, a flat rate, or project-specific)? Does the consultant have the authority to talk with anyone in the company? Who will the advisor report to? What’s the timeline? Set a completion deadline, but too often boards demand that the work be completed fast due to their own delays. Many times we even had to turn down some assignments that demanded completion too fast.

The typical process, especially for legal work at larger corporations, is for the board to contract the corporate counsel. This can be important when seeking outside legal advice because it helps reinforce legal privilege. Generally, the counsel will work with the board to identify someone who is independent and skilled. In mid-sized companies, the board or committee chair may take on the task of seeking and vetting consultants. Whoever handles procurement, background research, reference checking, and review of similar engagements is vital for assurance.

Clarify the level of work quality needed, that the information is really digestible, and that more in-depth treatment will be available. Plopping a legal brief or audit report in front of the directors without thoughtful explanation, Q&A and summary of key action items is a waste of money, and can bring its own legal dangers if urgent points are missed by the board. In some legally fraught engagements, a verbal report by the consultant is preferable to a written one.