The Advisory Board and the Board of Directors share a common objective: both try to steer the company on the right course. This can make them appear similar. In fact, they are quite different. Each has different objectives and levels of responsibility for the company.
Despite the major differences that may exist between the two, both are of great importance to the development of the company. In this article, we will explain:
- What is an Advisory Board?
- What is a Board of Directors? and
- What are the most important differences between them?
What is an Advisory Board?
An Advisory Board is a body made up of two or more experts that provide valuable subject matter advice to a company or to the founder/entrepreneur. They fill knowledge gaps in the company. The Advisory Board fulfills an essential function, which is to be an impartial third party that is aware of all developments and guides the decisions in the company.
There is no regulatory requirement to establish an Advisory Board. Many Advisory Boards serve in a volunteer capacity, at least initially and in the early stages of a company. As the company progresses along its journey, Advisors are compensated with equity in the company and many advance to serve on the Board of Directors.
Forming an Advisory Board is an excellent way for a company to tap into external expertise, obtain an independent point of view as well as determine if there is a fit between the company and the individual, be it for employment or Board roles. It is also fairly common for Advisors to become actual investors in a company. This happens as a natural extension of the relationship between a CEO and an Advisor over time. This also provides Advisors with the ability to observe and conduct due diligence on the company before deciding to invest.
What is a Board of Directors?
A Board of Directors (BOD of the Board) is a group of people, elected by the shareholders at the shareholders’ meeting by a majority of votes. The Board sets the strategy, oversees management and represents the interest shareholders. The Board is not responsible for the day-to-day operation of the corporation. The officers of a corporation are responsible for the day-to-day operation of the corporation. The Board of Director is responsible for the hiring and firing of the Chief Executive Officer of a corporation.
A corporation must have at least one Director. The number of Directors is specified in the articles of incorporation filed with the Corporate Registry (external) as well as in the By-laws of the Corporation (internal). An individual can be the sole shareholder, Director and officer of a corporation. This is fairly typical for smaller, private, early stage companies. The names of the Directors are registered with the Corporate Registry in the respective province/state or with Corporations Canada for federal corporations.
However, all public companies are required to install a Board of Directors. On the other hand, non-profit organizations and many private companies also usually appoint a board of directors, although they are not required to do so.
What are the Board of Directors’ responsibilities?
The scope of authority of the corporation’s management (the Directors and Officers) is so broad, the law imposes a wide range of duties and liabilities on them. In Canada, the Canada Business Corporations Act (CBCA) governs corporations. Whereas in the United States, the majority of states have adopted the Model Business Corporation Act (MBCA) as the basis of their own state laws. However, each of these states has modified the provisions of the MBCA. Canada and the USA share a lot of similarities. Provinces and states joined confederation at different times in history and as such these regions enjoy differing, special privileges, including the ability to establish some of their own laws and regulations.
In general, the duties and liabilities reflect the position of trust that Directors and Officers hold in relation to the corporation and its owners, the shareholders. While many of the duties and liabilities of Directors and Officers are prescribed in law, other duties and liabilities:
- are set out in other federal, and provincial/state or territorial statutes; or
- result from court decisions.
The primary duties and liabilities of the Directors of a Corporation are:
- Duty of care
- Fiduciary duty of loyalty
- Remain informed
- Prevent conflicts of interest
- Attend Board meetings
- Make, repeal and amend by-laws
- Appoint CEO and Chief Audit Executive (CAE)
The shareholders expect and trust the directors to conduct the corporation’s business in a way that will preserve and enhance the shareholders’ investment.
The decisions requiring Director approval and the mandate set out for the Board and any Board level committees are established in Committee Charters, supported by Committee Checklists that outline the Board Committees’ responsibility in a calendar format.
Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities. Although some decisions made by the Directors require the approval of shareholders, other important decisions can be made without such approval.
How to select members for the Advisory Board and the Board of Directors?
The selection process is fairly similar between the two boards. Although for obvious reasons, there is a lot more rigour associated with identifying, recruiting and electing Directors. Will set those aside for the moment.
The process starts with taking an inventory of where you are on the company’s journey, the challenges that you are facing, the decisions that you need support with and so forth. This drives the determination of the competencies that an Advisor or a Director needs to possess. A Competency Assessment or Skills and Capabilities matrix provides a structured way to execute this assessment and to guide the Advisors and Directors selection process. In addition, the Board has legal requirements that they have to adhere to. For example, members of the Audit Committee at the Board level have to possess financial acumen. In addition, the Board adheres to the corporation’s set out CSR/ESG targets. The most pertinent one at the moment is in terms of gender, ethnic and race diversity.
Strength comes from diversity! So select Advisors and Directors with diverse sets of capabilities and points of views.
7 differences between Board of Directors and Advisory Board
Both the Advisory Board and the Board of Directors provide strategic advice for the development of the company. However, there are substantial differences between the two, which we will detail below.
1. Fiduciary Responsibilities and Liabilities
The primary difference between Directors and Advisors is that Directors are legally bound to represent the shareholders of a company in a fiduciary manner and are liable for their actions and advice. As such, most corporations carry Directors and Officers liability insurance. On the other hand, there are no liabilities associated with taking the advice of an Advisor and they hold no accountability to the shareholders.
2. The obligatory nature
Corporations are required by law to have an elected Board of Directors, even if that Board is composed of one member. Advisory Boards on the other hand are entirely optional, as far as the law is concerned. There are no legal or regulatory requirements imposed on an Advisory Board member. The relationship, responsibilities and obligations are only those that exist between the Advisory Board member and the corporation, as set out in an Advisory agreement.
3. Nature of Advice
The type of advice that an Advisory Board can provide tends to be specific to a particular issue, set of issues and the strategy. Or, they could be directly to the founder of the corporation. On the other hand, the advice offered by a Board of Directors, encompasses the advice offered by an Advisory Board, plus all other matters of governance and oversight nature pertaining to the corporation.
4. Financial Compensation
Board of Director roles are almost exclusively compensated. The expectations, responsibilities and duties imposed on the Board are high and they can be found personally liable if they do not perform their duties. The compensation is commensurate with the role and responsibilities. Thus, members of the Board of Directors are typically compensated much higher than Advisory Board members. The compensation mechanism is the same for both Boards.
Only in the non-profit, non-governmental sector, Board of Director roles tend to be volunteer based.
5. Levels of Influence
The Board of Directors is a governing body that provides company oversight and is above the company’s CEO. Directors are elected by shareholder vote, as they are accountable to serve the interest of both the corporation and the shareholders. For this reason, the Board of Directors has a greater influence over the company, its culture and its growth than an Advisory Board.
6. Voting Rights
Another difference between the Advisory Board and the Board of Directors lies in the right to vote on decisions to be taken by the company. While the Board of Directors has voting rights and obligations, the Advisory Board does not. An Advisory Board can influence the decisions of the corporations and its officers but they are not able to make decisions for the corporation.
While an Advisory Board is not regulated by law, and is therefore more informal, the work of the Board of Directors is governed by federal, provincial/state laws, securities and exchange commission’s rules and the by-laws of the corporation. The external to the corporation laws set out the expectations and responsibilities for the Board of Directors, while the by-laws of the corporation set-out, amongst other things, how many meetings per year the Board of Directors should have, what aspects of the company the Board of Directors should be involved in and how Directors are elected, etc.
The Board of Directors is a governing body, provides company oversight and is above the company’s CEO. Directors are elected by shareholder vote, as they are accountable to serve the interest of both the corporation and the shareholders. For this reason, it has a greater influence over the company, its culture and its growth than an Advisory Board.
Although their purposes may be similar, there are major differences between an Advisory Board and a Board of Directors. Both Boards, at different levels, play a fundamental role in the success of a company. They provide a valuable external point of view to help a company see the forest for the trees, to understand or appreciate a larger situation/problem. However, it is only the Board of Directors that can set the guardrails. The corporation is under no obligation to act on the advice of the Advisory Board.