Summary
- Advisory boards provide non-binding guidance to company management and do not replace the traditional board of directors, which retains full control over company decisions.
- Members are not employees and are not involved in day-to-day management, though they may receive a fee or shares for their time.
- Joining an advisory board carries legal considerations, including confidentiality obligations and potential conflicts of interest, typically governed by a non-disclosure agreement.
- This article is a plain-English guide to advisory boards for Australian business owners, covering the legal and practical considerations of establishing or joining one.
- The article was prepared by LegalVision, a commercial law firm that specialises in advising clients on corporate governance and business structuring.
Tips for Businesses
Before appointing advisory board members, confirm there are no conflicts of interest with competitors. Have members sign a non-disclosure agreement to protect confidential information. Define the scope of the role clearly, including meeting expectations, fees, and any equity arrangements, to avoid disputes later.
On this page
As an individual with previous business experience, you may want to join an advisory board to advise and guide other businesses. This experience is often very broad and versed in dealing with various issues. To establish whether you should join an advisory board, you must first understand its purpose and role. This article will outline what an advisory board is, its necessity and whether you should be a part of it.
What is an Advisory Board?
Advisory boards are informal bodies that provide non-binding advice and guidance to company management. Their purpose is to assist a company with achieving its business aims, navigating challenges, and providing outside-the-box perspectives and solutions. They serve a company in addition to a traditional board of directors. Some advantages can include, but are not limited to:
- they are less formal than traditional boards;
- they can be cheaper to run than traditional boards;
- their advice and recommendations are not binding;
- the directors and shareholders of the business can retain full control;
- they can offer unbiased insight since they are not part of the day-to-day operations of the company;
- they can bring expertise from other sectors; and
- they are a good way for businesses to consider people for management positions.
Often, startups and smaller businesses will have a very small traditional board (usually just the founders). They will then use the advisory board for advice and guidance. However, the traditional board will still retain control over the day-to-day decisions in accordance with the company’s articles of association and shareholders agreement.
Key Differences Between an Advisory Board and a Traditional Board
One key distinction is that traditional board members usually sit for a term in office. This is not always a requirement for advisory board members. Directors may receive a salary or be employed by the company, whereas advisory board members generally do not, although they may receive a monthly fee for their time. Some companies may also pay the advisor for expenses arising from the undertaking of their duties, or they may also offer shares in the company in exchange for their time. Advisory board members are not involved in the company’s day-to-day management. However, they may provide advice on financial or operational points if called upon by the directors.
Learn how to meet your directors’ duties and ensure compliance with LegalVision’s free UK Board Reporting Toolkit.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
Advantages of Joining an Advisory Board
One of the primary advantages of being part of an advisory board is the opportunity for professional growth and development. As an advisory board member, you gain exposure to new industries, business models, and challenges that may differ from your primary area of expertise. This exposure can broaden your perspectives, expand your knowledge, and enhance your problem-solving skills.
Joining an advisory board also offers valuable networking and relationship-building opportunities. You may have the chance to interact with industry leaders, influential stakeholders, and potential business partners. This can lead to expanding your professional network, increasing visibility, and establishing valuable connections that may benefit your career or business ventures in the future.
Disadvantages of Joining an Advisory Board
Joining an advisory board can be a significant time commitment. Advisory board members are typically expected to attend regular meetings, prepare for discussions, and potentially contribute to additional projects or initiatives. This can place significant demands on your time and may conflict with your work or personal obligations.
Another consideration is the potential for conflicts of interest. As an advisory board member, you may have access to sensitive or confidential information about the company’s operations, strategies, or future plans. It’s crucial to ensure that your involvement does not create conflicts with your current employment or business interests and that you maintain strict confidentiality and avoid disclosing sensitive information. Most companies will likely require all advisory board members to sign non-disclosure agreements. Signing a non-disclosure agreement exposes you to liability if you unlawfully share confidential information. If you are considering joining an advisory board, you should consider the impact confidentiality restrictions will have on you and your other commitments and interests.
Requirements for Joining an Advisory Board
The requirements to join an advisory board will depend on the company’s specific needs. Often, companies want someone with extensive experience in a particular industry, such as human resources, law, finance, or technology. Companies may also want to recruit people with expertise in their industry; however, they must consider potential conflicts of interest and whether prospective advisory board members work for direct or potential future competitors.
There are several advantages to a company having an advisory board which is a great opportunity for advisory board members to develop and expand their network. However, advisory board members will likely be required to sign a confidentiality agreement and may be required to invest significant amounts of time into the position without pay. It is key that both companies and advisory board members ensure that there are no conflicts of interest, as this could lead to a dispute.
What to Check Before You Sign Anything
Before you agree to join an advisory board, review any documents the company asks you to sign. Most companies will ask you to sign an advisory agreement. This document sets out your role, time commitments, any fees or shares you will receive, and your confidentiality obligations.
Check whether the agreement includes a restraint of trade clause. This could stop you from working with competitors during or after your time on the board. In Australia, these clauses are enforceable if they are reasonable in scope and duration.
Also, check whether the company will cover your expenses. Some agreements are silent on this, which means you may need to cover costs yourself.
If you are unsure about any terms, get legal advice before you sign. Signing without understanding your obligations can expose you to liability later.
Key Takeaways
An advisory board provides non-binding advice and guidance to a company, offering expertise and insights without the formal responsibilities of a traditional board. Startups and smaller businesses often use them to complement a small board of directors.
While advisory board members can gain professional growth and networking opportunities, the role may require significant time commitment and careful management of potential conflicts of interest. Unlike traditional board members, advisory board members are not involved in day-to-day management and typically do not receive a salary, though they may receive a fee or shares.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
How does an advisory board differ from a traditional board of directors?
Unlike traditional boards, advisory boards are informal, with members typically not receiving salaries or holding terms of office. Their advice is non-binding, and they are not involved in the company’s day-to-day management, offering flexibility and outside expertise.
Are there any potential drawbacks to being on an advisory board?
Yes, the role can be a significant time commitment and may involve managing conflicts of interest. Advisory board members must also maintain confidentiality, often signing non-disclosure agreements, which can impose legal liabilities if breached.
Can advisory board members be held legally liable for company decisions?
No. Since advisory board members provide non-binding advice, they generally bear no legal liability for company decisions. However, they can face liability for breaching confidentiality obligations under a non-disclosure agreement.
Do advisory board members receive equity in the company?
Sometimes. Companies may offer shares in exchange for an advisory board member’s time and expertise, though this varies by company.
We appreciate your feedback! Request your free consultation now.
