The pros and cons of a board of directors vs an advisory board.
More and more mid-market growth businesses are turning to advisory boards instead of the more formal board of directors to improve and grow their business.
This is particularly so in New Zealand and Australia, where the cost of a board of directors can be so high that it may hinder business growth.
When a business is growing rapidly and outstripping the capability of its teams, questions of business structure and financial security are often top of mind. A board of directors can play an important role in ensuring the business complies with all necessary legislation and remains financially solvent. However, there are also many benefits of establishing an advisory board, particularly in the early stages of high business growth or when growth has stalled. It is important to understand the difference between an advisory board and a board of directors to ensure you make the right decision for your business. Here are some key points to consider.
Advisory Board vs Board of Directors
A board of directors is responsible for the governance of the company. They are elected and are mandated to act in the best interest of the company and the shareholders – not in the interests of employees. The CEO reports to the board and the board is responsible for signing off the business plan and the accounts.
A board of directors also have statuary and fiduciary duties to a company and failure to meet these duties can result in legal action.
An advisory board, by contrast, does not represent shareholders and isn’t bound by fiduciary responsibility. It can provide strategic advice, but an advisory board has no power to instruct or direct, therefore any advice given does not have to be taken or implemented by the CEO or management team.
This is a very clear difference between the two boards and is an important distinction. An advisory board may be set up and provide advice as per their scope, but as the Institute of Directors states, the business “must have absolute discretion to accept or disregard any recommendations made by [the] advisory board.”
Driver of Revenue Growth and Profits
Advisory boards should assist in driving strategic revenue growth and profits and can be set up to work on a specialist area of interest – for example entering into a new market, building a new business channel, or providing specialist advice for sales and marketing. The advisory board is, therefore, set-up to help the business grow in areas where the experience of the current team is limited. This flexibility and specialist support is particularly useful for the mid-market.
Size and Cost
The cost of a board of directors is high due to their risk, duties, and liability. This is why directors are paid well. In addition, many companies take out insurance to help cover the personal liability of directors. If a company is in the early stages of growth or is not big enough, that cost can hold the company back by reducing cash to fund growth.
The composition of a board of directors is also vitally important. The Institute of Directors states that “it is necessary to have a mix of strengths between members. For example, a value-adding board may have one member with experience in finances, one director who is a specialist in sales and marketing, another member who has general management experience, and a member with expertise within the industry of the organisation. Every director needs to contribute something unique and of value to the overall culture and vision of the board.” It is also important to make sure the directors are not ‘cut from the same cloth’. Diversity in background and diversity in experience are essential to ensure the mix is right to achieve the vision of the company and its shareholders. These composition requirements also mean that a board of directors must be of a certain size.
Fiduciary vs Specialist Advice
Advisory boards generally cost less and can be smaller. An advisory board can bring different skills to the company as they need them. They can focus on a specialist area (e.g. exporting, marketing or product development) and advisors can be recruited with that expertise in mind. The number of people on an advisory board is also flexible with most advisory boards being much smaller than formal boards of directors.
In addition, a number of options exist for compensation of an advisory board, for example, voluntary involvement, paying per meeting, paying a retainer or giving equity in the business.
Both Can Work Too
Sometimes it can be beneficial for a company to have a board of directors and an advisory board. Larger companies who have a board of directors often set-up advisory boards for specialist advice also. Occasionally the makeup of a board of directors can slow company growth with too much focus on compliance. This is when an advisory board can help as a driver of revenue growth and profits.
So as you are growing your business or if you are feeling your growth has stalled, consider an advisory board of specialists to help move your business forward.