What is the Difference Between an Advisory Board and a Board of Directors?

As a business owner, you may be conscious of bringing in external advisors to help identify your business needs and counsel your leadership. One way of doing this is to bring in experienced third parties to your board of directors. However, this can be an expensive and formal process, which can bring liability to the advisor. You may instead want to appoint an advisory board.

This article will explain some of the key differences between an advisory board and a board of directors, and touch on some of the advantages and disadvantages of using them. 

What is a Board of Directors?

A board of directors is a formal board that is responsible for running your company. Mainly directors will make up the members of the board. Board members will usually have fiduciary duties, meaning that they have legal responsibilities to act in the best interest of the business and its shareholders. 

Board members are elected by the shareholders of the business to make decisions about how directors should operate the business on the shareholders’ behalf. They meet at formal board meetings, where they discuss business strategy and finances. Within these meetings, they are able to decide on the actions that the company should take, which are usually binding.

In large companies, the board of directors can be a large group of individuals, ranging from the executive team (i.e. executive managers) to independent directors. 

What is an Advisory Board?

An advisory board, on the other hand, is an appointed group of individuals who are responsible for giving advice on the way that the company should be run. This is a less formal group that effectively acts as a ‘sounding board’ for the board of directors. 

Advisory board members typically include key business representatives who have experience within the company’s industry, as well as an independent chair and in some cases, a number of lawyers, accountants, and marketing experts. Effective board members will know your business very well and will be able to add value to ideas. This will help you meet current business needs and implement long-term strategies. As a result, having good advisors can be an important way of keeping an overall effective board within your company. 

Typically, you can appoint advisory board members by reaching out to members of the business community and asking if they wish to be part of your board. Alternatively, you could recruit members through an agent. 

Key Differences

There are some key differences between a board of directors and an advisory board. 

First, there are differences in the legal responsibilities of each board. A board of directors has a fiduciary duty to its shareholders, meaning that they are legally liable for failing to meet the required standard. As a result, they can also be financially liable if the business is sued, has a significant downturn, or becomes insolvent. An advisory board, on the other hand, is held to a much lower standard of care. 

Second, a board of directors has voting rights in board meetings. This means that they are directly able to influence the decision-making process in the business. Advisory board members, on the other hand, have no voting rights. The business leadership does not need to adhere to the advisory board’s suggestions.

Third, an advisory board will focus more closely on industry-specific advice and details on operations. In other words, they are there to help fill in gaps of knowledge at the company. Conversely, the board of directors may be more focused on shareholder value and the bigger picture. 

Finally, companies compensate different boards in different ways. Typically, bringing in a director will cost more money than bringing in an advisory board member. 

Should I Appoint an Advisory Board?

An advisory board can add value to your decision-making process and fill in gaps of knowledge at your company. They are easy to create and expand, less costly than hiring board members, and can help you build knowledge to access new markets within your business. 

As such, it can be a good idea to consider appointing an advisory board if you believe that there is something missing from your board of directors. However, this is typically most useful for larger companies who are looking to expand as part of their business strategy. On the whole, whether an advisory board would benefit your business depends on your strategy and current expertise.

Key Takeaways

As a business owner, you may wish to consider appointing an advisory board. This is distinct from a board of directors in a number of ways, including in their legal liability, expertise, voting powers, and costs.

An advisory board can be a good way of plugging in gaps in knowledge in your company, but it is nonetheless a costly exercise. As a result, it is a good idea to hire one if you think that it would add value to your business and help realise your overall strategy. If you have any questions regarding appointing an advisory board, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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