A relatively inexpensive and effective way to strengthen an organisation is by establishing an Advisory Board.
Performance orientated organisations, including large conglomerates, statutory authorities, not-for-profits and public companies, establish advisory boards to provide management with an inexpensive and flexible sounding board of expertise and advice.
The reasoning for establishing advisory boards will differ between each organisation, but required in each case is a need for a set of senior leaders with relevant expertise who can look at opportunities and issues and provide strategic insight.
Advisory Boards can:
• Provide strategic input and advice to management.
• Have relatively reduced liability compared to statutory boards.
• Be less costly to maintain than statutory boards.
• Help deal with specific objectives such as expertise in a new market or new regulations.
• Help the organisation benefit from leveraging the experience and credibility of the Advisory Board members to access new capital, clients and expertise.
An advisory board is a committee of individuals selected by relevant stakeholders (the owner in the case of private companies and the statutory board for public companies), to provide defined advice and information to the owners, board and management.
Advisory boards counsel, guide and recommend in terms of routine activities and have no power of decision making.
Importantly, they are not a substitute for a statutory board of directors.
The purpose and composition of an advisory board differs for each organisation and will be dependent upon the life cycle of the organisation, its strategy or specific need for expertise.
An advisory board is different to a statutory board.
The following are differences found in advisory boards:
• No fiduciary responsibility. Unlike a statutory board of directors, advisory board members are not governed by legislation or listing requirements.
• No powers of management. Advisory Board members counsel and have no powers to veto management decisions.
• Do not represent shareholders.
• Report directly to Management and provide advice and support to the CEO. Statutory boards report to the shareholders and then to management.
• Less formal than a statutory board of directors
• Appointed by the managing director (usually) and not by shareholders.
The following are responsibilities typically undertaken by Advisory Board members.
• Provide industry perspectives and expertise.
• Provide independent guidance and counsel.
• Further strengthen financial and strategic advisory credentials.
• Enhance domestic and international reach by leveraging the networks of advisory board members.
• Network with other members of the board, management and owners for the benefit of clients, regulators and other stakeholders.
• Advise on new strategic objectives.
A Statutory Board of directors has a fiduciary responsibility to the company. However, Advisory Board members do not have the same implied fiduciary responsibilities. Notwithstanding, there can be a fine line between Advisory and Statutory Board membership, as there is legal precedent in Australia that if a person is ‘seen’ to be acting as a Director of a company, then that person is considered to be a Director of the company in question. For this reason, the charter of an Advisory Board and the responsibilities of its members must be clear and not encroach upon Statutory Board activities.
Since, Advisory Board members are not burdened with the same fiduciary responsibilities as a Statutory Board, their compensation is lower and thus the organisation reduces its costs whilst benefiting from their expertise and oversight.
An Advisory Board member’s experience and association related to a specific industry, market or knowledge of growing a business is used as a sounding board to support decision making.
Advisory Board members are typically very experienced or high-profile executives who can therefore provide management with corporate credibility and reputation enhancement through association
Organisations can grow faster and improve their performance by leveraging the networks Advisory Boards possess. For example, former politicians and bureaucrats are popular appointments to conglomerates to leverage key foreign contacts or greater access and understanding to new regulations.
Advisory Board members are not appointed by shareholders and thus do not owe interest groups or specific shareholders any duty. They are hired on the basis of providing expertise and guidance on a specific needs basis. Moreover, Advisory Board members are not typically hired from within the firm and can therefore usually provide an independent perspective.