Advisory Board / Board of Directors – Is There a Difference?
Woodstock: ”What’s the password?”
Ace Ventura: ”New England clam chowder.”
Woodstock: “Is that the red or the white?”
Ace Ventura: “Ah, I can never remember that. White.”
[Door opens] Ace Ventura: “Yes.” – Ace Ventura – Pet Detective
So, I was at an advisory board meeting at one of my growth companies, recently, when certain previously omitted items appeared on the agenda. The items included approval on capital improvements, a key decision on a lease and ratification of compensation for key executives. I would like to say it seldom happens but as the subjects started to be discussed, all I could think about was this famous scene from Ace Ventura. I began to realize, again, that despite the sophistication of many of the entrepreneurs that I work with, purpose seems to get blurred between the roles of an advisory board (AB) versus a Board of Directors (BD). So, I thought I would provide a little refresher. Please note; this is not a legal analysis but just pure practical experience.
An advisory board consists of a group of experienced and knowledgeable mentors that has no official capacity and no fiduciary responsibility. While members do their best to help provide guidance on the problems at hand, their role is to serve as a sounding board for ideas and solutions and not to be either a problem solver for an entrepreneur or an “approver” of corporate actions. Many entrepreneurs misunderstand this role and believe that the advisory board can serve in a very active almost management capacity and provide all their expertise to the company. This usually does not happen resulting in frustration for both parties. That being said, I strongly encourage entrepreneurs (especially the less experienced) to have an AB.
It is the Board of Directors who has ultimate responsibility for corporate governance which includes everything from major decisions to potential sale of the company to removal of key management members including the CEO, if necessary. It is that fiduciary responsibility (and potential liability) that sets the two apart (thus the famous Directors and Officers insurance for BD members.)
It is important for any entrepreneur to know the difference between an advisory board and Board of Directors, and if necessary, to seek help and guidance in establishing the roles and in recruiting members. I know a number of experienced board members who do not take AB roles but only join a BD. They believe they need to have skin in the game for their advice to matter; many BD members invest and most are granted incentives such as fees to attend meetings, stock-options and the like. They believe they need the authority that allows them to function as “board members.”
While both are extremely important, not having a Board of Directors to handle key fiduciary responsibilities can put the owner at risk, so strongly consider having one. Having said that, if you keep your expectations in check, any entrepreneur will find an advisory board can also be a very valuable asset.