An Advisory Board vs. Board of Directors – What’s the difference?
A board of directors is a group of individuals elected to represent shareholders and governed by legal responsibilities. If a company plans to go public then it is legally required that it set up a formal board of directors. Whereas an advisory board is an informal group of experts selected by the executive team or the board of directors. 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 between an advisory board and a board of directors:
- 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 held 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.
- Voting Rights
A board of directors has 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. Conversely, advisory board members 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. The Diligent Insights website expands on voting rights for boards.
- 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 board of directors and any decisions made have a higher level of impact, as noted by Silverman. 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.”
- Expenses and Compensation
It costs more to create, manage and compensate a board of directors than it does an advisory board. Additionally, travel expenses and attendance fees are covered by the company 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.
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Author Byline: Written by our Cerius Team, approved by our CEO Pamela Wasley
Post Date: this post was revised October 2020