Board of Directors vs. An Advisory Board – What’s the difference?
A board of directors is an elected group of individuals to represent shareholders and governed by legal responsibilities. If a company plans to go public then it is legally required to set up a formal board of directors. The executive team or the board of directors selects an advisory board – an informal group of experts. An advisory board provides valuable assistance to a company but is not financially liable to the company or its shareholders.
Larger companies often have both a board of directors and an advisory board that provide business advisory services. Advisory services can help a company grow beyond its competitors and increase shareholder value. Both types of boards are useful but serve different purposes.
Outlined below are other key differences:
1. Fiduciary Responsibilities
Board expert Marissa Levin says in Smart CEO magazine “There are quite a few differences between a board of directors and an advisory board, but the major difference lies in fiduciary responsibilities. The level of fiduciary obligation is much higher in the board of directors than an advisory board”. In other words, the board of directors is financially liable when a company takes its advice. Conversely, the advisory board is not financially responsible when a company takes its advice. It is perhaps this reason why advisory board members readily offer more information than a board of directors.
2. Voting Rights
A board of directors has voting rights and the power to make changes in the organization. Members of the board of directors as a governing body vote upon major decisions. They even have the power to remove the CEO or make alterations in the executive management team. Conversely, advisory board members have no voting rights. The CEO or executive team have no obligation to take the advice of their advisory board, and it is entirely up to them or the board of directors to follow that advice. The Diligent Insights website expands on voting rights for boards.
3. Nature of Advice
Although both boards provide business advisory services, neither gives the same kind of advice. Ginger Silverman, current board member of Trilogy Financial, speaks of her many years of experience on boards: “The level of tender and hands-on tactical advice is higher for me on the advisory board capacity”.
The advice of the board of directors is more strategic and focused on a higher level. Shareholder value is a major consideration on the directory board and any decisions they make have a higher level of impact, which Silverman notes. However, on the advisory board advice tends to be more specific to the actual changes happening in the company on an operational level. Participation from board members is more active on an advisory board, and there is a free flow of information and discussion.
Advisory board members are usually selected based on the targeted expertise that they can bring to the company. They help fill in gaps of knowledge and break into new markets and industries. Silverman says of her selection on an advisory board, “When I was hired to join an advisory board the work was specific to the expertise that I brought [to the board], so I was able to advise and … in some ways participate in the execution of what was being discussed and agreed to in the advisory board.”
4. Expenses and Compensation
It costs more to create, manage, and compensate a board of directors than it does an advisory board. Additionally, the company covers travel expenses and attendance fees for the board of directors. Attendance fees for board meetings depend on the size of the company. The larger the organization, the higher their attendance fees.
Learn how you can find reliable, experienced business advisors at Cerius Advisors. We can help you avoid painful lessons by talking to someone who has already been down the road before you!