For strategic growth, many companies consider the addition of a board of directors or an advisory board to boost success, increase profits, and improve organizational depth. As a team of industry experts or leaders, they can provide valuable advice on pivotal business decisions that help your business become more successful, efficient, and profitable.
But, when deciding to add governance to your business structure, one of the first questions you must ask is: What is right for my business? Should I add a board of directors or an advisory board?
In regards to advisory boards vs. boards of directors, there are distinct differences you should know. Here, we will help you decide what’s right for your family business by asking the most frequently asked questions about boards of directors and advisory boards.
What is the difference between board of directors and advisory boards?
Before we get into the differences between boards of directors and advisory boards, let’s first review what the two board types have in common. Each group exists to support and help the respective businesses succeed in the goals they’re trying to achieve.
The biggest difference comes from the formality of the board of directors and the legal obligations. For a board of directors, one of their primary objectives is to ensure sound governance. That means their roles and responsibilities will include fiduciary responsibilities to shareholders, assisting in the management of assets, and supporting the executive team for optimal success. In the creation of a board of directors, you’ll be guided by articles of incorporation or bylaws that determine how voting is conducted, how decisions are made and communicated, and how the company’s leadership team will be upheld to certain standards and expectations.
Given these formal responsibilities, it is important to recognize that companies often will equip themselves with Directors & Officers Liability Insurance (D&O) that will indemnify directors from claims brought upon by employees, clients, or shareholders.
The advisory board structure, however, is much less formal. The advisory board’s primary focus is on providing advice and insight to the respective industry and or business operations.
While both board types might be comprised of experts in the field, the way in which they operate and function is the biggest difference between the board of directors and advisory boards. Advisory board members may come and go or be used intermittently. A board of directors will participate in regular meetings and uphold their director duties as outlined by the requirements at incorporation.
Can you have an advisory board and board of directors?
Yes, in fact, some boards of directors will directly create or implement an advisory board themselves when the company calls for a specific reason to do so.
What is the difference between a director and an advisor? What do they do?
A director has the responsibility to make governance decisions, vote on proposals presented by the company’s executive team, and execute actions that put the company or organization’s and shareholders’ needs ahead of employee needs.
An advisor, however, does not have the formal obligation to the company or to its shareholders. Put simply, advisors are asked to provide advice on the issue at hand.
By definition, a director is elected to make decisions and execute actions that are in the company’s shareholders’ best interests. Advisors, however, do not have the same formal obligation to shareholders or to the company, outside of providing advice on the assigned issue or company objective.
It is important to note that both directors and advisors should be and often are compensated for the job and responsibilities they perform in support of the company.
Double Iron Consulting – A Stepping Stone to Success
In life, we often consult with an expert or a trusted advisor or friend when making significant decisions. From financial planners to doctors to counselors, we seek out the advice of those that know best, time and time again.
In business, it’s no different. When it comes to strategic growth, leadership development, succession planning, customer experience, or internal alignment, Double Iron Consulting is the expert you can call in to lean on for advice.
As a third-generation leader of a prominent coffee roasting business in the South, business veteran Bill Smith has seen it all from being involved in the family business from a young age. So, put that experience to good use for your own success! Schedule a consultation with Bill to get started on making the changes you need to succeed with your business.