An Advisory Board vs. Board of Directors – What’s the difference?
All companies look for a wide range of sources to provide them with business advisory services. This kind of advice can help a company grow beyond its competitors and increase shareholder value. If a company plans to go public then it is legally required that it set up a formal board of directors. An advisory board is a rather informal committee of members selected by the executive team or the board of directors. They provide valuable assistance to the company but have no fiduciary responsibilities.
Major companies may have either or both a board of directors and an advisory board to help provide business advisory services. When creating either board, business owners often get confused between the two thinking they both serve the same purpose. However they are actually quite different.
Marissa Levin is a renowned author, speaker and expert on boards. She shares knowledge of her expertise in a column in Smart CEO magazine, on TED talks and has also written a book on creating exceptional advisory boards. Marissa says “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.”. If the advice of your board of directors steers your company in the wrong direction, they are financially liable for that bad piece of advice. It is perhaps this reason why advisory board members readily offer much more information than a board of directors because they are not held liable for their advice.
An advisory board is a hand selected, informal committee of people with no legal responsibilities to the company and whom have no voting rights. The CEO or executive team is not obligated to take the advice of their advisory board, and it is entirely up to them or the board of directors to follow that advice. On the contrary, the board of directors have voting rights and the power to make changes in the organization. Major decisions are voted upon by members of the board of directors as a governing body. They even have the power to remove the CEO or make alterations in the executive management team.
Nature of Advice
Although both boards provide business advisory services, neither gives the same kind of advice. “The level of tender and hands on tactical advice is higher for me on the advisory board capacity,” says Ginger Silverman speaking from her experience on advisory boards. Ginger has served on advisory boards and boards of directors for private, public and non-profit companies including Norco Delivery Services, IVIU technologies, Cutagenesis, Oroscience, and Susan G Komen.
As an experienced board member, Ginger notes that the advice of the board of directors is more strategic and focused on a higher level. Shareholder value is a major consideration on the board of directors and any decisions made have a higher level of impact. But 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.
Board members usually require the outside help of a financial or legal expert to understand the company’s position and issues. 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. Ginger 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.”
Expenses and Compensation
The costs in the creation, management and compensation of the board of directors is higher than that of an advisory board. Compensation for a director on the board is also higher than that of an advisory board member. Additionally, the board of director’s travel expenses and attendance fees are covered by the company. Attendance fees for board meetings depend on the size of the company; the larger the organization, the higher their attendance fees.
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