What is the Difference Between Advisory Board vs Board of Directors
Keeping a reliable group of advisors is a significant aspect of ensuring that your business is growing in the right direction. Typically, one can observe two variations of a board – the advisory board and the board of directors. Every company looks for a diverse range of channels to give them trusted advisory services, which can help the company surpass its existing competitors and raise the shareholder value.
The primary difference between an advisory board and a board of directors is that fact that an advisory board is more of an informal kind of committee that is hand-picked by senior executives or even the board of directors. This means that they are not beholden by any fiduciary responsibilities, even if they provide valuable guidance. By contrast, a board of directors is a legal entity that is required when the organisation is going to become public. Here is a point-by-point assessment of how an advisory board and a board of directors differ:
The Kind of Advice Presented
A board of directors typically steers the company in a strategic direction, thus assessing shareholder value is vital before any advice is given. In terms of the advisory board, the advice is focused on the day-to-day operations and solutions are often with regard to on-ground developments in the company. Due to the relatively informal nature of the advisory board, the free flow of conversation and discussions are more commonplace, versus with a board of directors. Further, board members may need the help of an external advisor in finance, business or law in order to fully grasp the organisational brand and its unique challenges. This is not applicable to an advisory board, which already consists of knowledge experts in the industry.
Type of Expenses and Compensation Given
A board of directors means increased cost to an organisation, since it is far more expensive to organize, manage and maintain. Board members must be paid for participating in meetings and are also reimbursed for any travel-related expenses. The larger your organisation is, the higher the meeting attendance fees. In comparison, an advisory board is given lower compensation for the same responsibilities. Sometimes, they are amenable to an alternative arrangement, where they receive an equity stake in an organisation instead of meeting fees or travel reimbursements.
Liability to the Company and its Shareholders
An advisory board member is not to be liable for any issues that arise indirectly or directly because of their advice to the company. This means that there is no requirement to have D&O liability insurance. Due to the reduced risk involved, more individuals are open to accepting a position in this capacity, as compared to joining a board of directors. The CEO or senior executives at an organisation are not obligated to follow the advice given, and it is their choice whether they would like to go ahead with the suggestions made.
A board of directors is bound by its fiduciary duties, which means they are legally bound to the company in service and if any mistakes are made, they are also financially liable for the consequences. Thus, advisory board members tend to share more information about a certain situation or organisational challenge, versus a board of directors due to the nature of the role. As is evidenced by the discussion above, there are multiple differences between a board of directors and an advisory board. It is up to an organisation to decide which type of advisory service is best suited to their business. This decision can be made keeping in mind the size and development stage of the company.
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