A board of directors and an advisory board are two distinct entities that have distinct roles. often, there is confusion around the distinctions. This is partly due to the fact that certain companies employ the terms interchangeably and also the word “board” is a word that has many connotations within the business world. This can be exacerbated by not clearly defining the purpose of the advisory council either through a bylaw, or resolutions for boards.
It is crucial to draw a clear distinction between your advisory board and your board of directors. This will allow you to avoid confusion when you are working with people who might not be legally able to serve as directors, like teachers who have set up micro-schools, or experienced entrepreneurs with no personal stakes. This is vital as a legal board has obligations, liabilities and risk that an advisory board won’t.
An advisory board is there to serve as a listening board to the management team and CEO, providing them with advice and connections they would otherwise not have access to. Typically advisory boards aren’t shareholders or Board Member shareholders in the company, and they do not hold an interest in the company’s voting.
It is also important to note that, even though they might have expertise in specific areas, an advisory board does not have the authority to direct the company. This is because the CEO and management team are accountable for making decisions not the advisory board. The only way for an advisory board to have the power to direct the company is if they are granted formal status as a committee on the board, which includes voting rights and liability protections through Deeds of Indemnity, Access and Directors and Officers Insurance.
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