Advisory Boards: Roles, Responsibilities and Rewards

The quality of an entrepreneurial company’s executive and management team, as well as the staff selected by that group, is critical to meeting growth objectives. But to whom can the senior management team turn for advice and guidance?

by Andrew J. Sherman http://www.entreworld.org/Content/TopAdvisorsBio.cfm?BioID=63

Senior Partner, McDermott, Will and Emery
Entreworld.org

Who provides the general policy and direction to the company’s executives around whom a specific growth plan can be created and executed? For most entrepreneurial companies, the answer is twofold: a formal Board of Directors and an informal Advisory Board, or series of advisory boards, each for a specific purpose.

These two boards are often confused. Actually, each plays a very different role and has very different responsibilities. A Board of Directors is required under virtually all applicable state corporate laws and owes very specific fiduciary duties to the shareholders of the corporation as described below. A company’s basic governance structure is that the shareholders elect the directors, who, in turn, appoint the officers. It is the role of the directors to set broad goals and policy objectives for the company which will benefit and protect the interests of the shareholders, and it is incumbent upon the officers to develop and implement plans to meet these goals and objectives.

Advisors: Roles and Responsibilities

A strong director has broad-based business experience, strong industry knowledge, a useful Rolodex, adequate time to devote to understanding the company’s major challenges and weaknesses, and the objectivity to challenge decisions made by the management team. He or she is a good listener and sounding board for the team and someone who is generally well trained in the university of hard knocks. A skilled director does not get easily discouraged if the company goes off course nor does that individual view the world through rose-colored glasses. Board members need to take their responsibilities seriously and not be too casual about executing critical tasks, such as board meeting preparation and attendance. Nor should they take confidentiality lightly or pursue what appears to be a personal agenda. Each board member – and the group as a whole – must be constantly guided by "What is in the best interest of our shareholders?"

An Advisory Board, on the other hand, is not required by state corporate laws, does not owe the same levels of fiduciary duties to the shareholders – and hence cannot generally be held as responsible for their acts or recommendations – and can be much more informal with regard to the number of meetings and agendas for meetings. The Advisory Board can be assembled for general purposes or a series of Advisory Boards could be set up for specific purposes, such as technical review, marketing strategy, recruitment and compensation, or research and development. An Advisory Board can also be an excellent way to get a second opinion on certain matters without interrupting existing relationships. For example, you may want access to a highly respected business lawyer but be reluctant to fire your current law firm. Asking that lawyer to serve on your Advisory Board can be a good compromise.

Setting Up the Advisory Board

Entrepreneurs will often set up an Advisory Board in connection with the capital formation process in order to demonstrate to prospective investors who review the Business Plan that the officers of the company have access to a credible and objective source of advice and contacts, without filling up precious Board of Director seats. Usually, seats on the Board of Directors are initially set-aside for co-founders and investors. In addition, many prospective Advisory Board members may be reluctant to accept the responsibility that comes with a board seat, especially at the outset of the relationship. Of course, the "showcase value" of putting forth a bunch of names of people who barely know you and who will never show up for any meetings dilutes the credibility that you sought to establish when appointing the Board of Advisors. Prospective investors will put varying weights on the strength and composition of the Board of Advisors when making final investment decisions and will often want direct access to the Advisory Board members as part of their due diligence process and to ascertain the depth of their commitment.

One critical difference between a Board of Directors and an Advisory Board is the ability on the part of top managers to accept or ignore the recommendations of any Advisory Board, a worry they do not have when a mandate comes down from the Board of Directors. Also, because members of the Advisory Board do not owe the same duties to the company and its shareholders, they can be used for mediating disputes by and among the officers or and between the officers and the directors. They can also be used for identifying potential candidates for the seats on the Board of Directors.

An Advisor’s Rewards – and Yours

Since the rules governing the Board of Advisors are not set forth in a corporate law statute, it is critical to be very clear as to your expectations of each Advisory Board member as well as to how they will be compensated for their efforts. The best way to capture these objectives and rewards is to prepare an Advisory Board member. In the early stages of the company’s development, for example, the rewards to Advisory Board members should be structured in a fashion that encourages a long-term commitment and provides for being a proactive, not merely a reactive, contributor to the company’s growth plans. Carefully recruited and properly compensated, an entrepreneur’s Advisory Board members are able to return to the company benefits that cannot be duplicated by its Board of Directors. Free from the fiduciary mandates that govern directors, advisors can provide much needed guidance and support, as well as work behind the scenes to smooth difficulties and provide second opinions – all in an effort to keep the company moving along on its growth path.

©2003 Ewing Marion Kauffman Foundation

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