Both an advisory board and board of directors exist for the same main reason: to help the company or organization succeed. So, if they both exist for the same fundamental reason, then why the need for two different titles?
What’s the difference, and how will you know which one will help your business thrive?
It comes down to two words – directors and advisors. One directs and governs the organization based on legal responsibilities. The other is an informal group of advice experts. They are chosen by the company to guide and advise the board of directors without any legal or financial liability to the company. Both types of boards are useful but serve different purposes.
Azul B2B is the expert business assistant, here to help you decide what your business could benefit from. We’ll help you examine an advisory board vs. a board of directors by comparing the impact of developing one, or both, for your business. Let us help you make the right business decision and jumpstart your leadership’s productivity today.
Defining a Board of Directors
A board of directors is a group of individuals who are legally responsible for the governance, control, direction, and management of an organization. That’s a lot of pressure for one group. In today’s competitive business environment, organizations often seek outside expertise to help the company grow and prosper.
Traditionally, companies seeking external advice invite advisors to join their board of directors. However, the formality, liability, and cost of a board of directors make an informal, budget-friendly alternative, an advisory board, a popular choice.
Defining an Advisory Board
An advisory board is a team of people appointed to guide, counsel, and advise a company’s business leaders.
Members are appointed based on:
- Specialized knowledge,
- Strategic advice,
- Or technical expertise
They are counted on to help solve a range of difficult challenges the company may be facing.
Businesses of all sizes can benefit from developing their own team of external advisors. A board of advisors is particularly useful in start-up and small companies, providing fresh ideas and unique perspectives to a growing organization.
Similarities between Board of Directors and Advisory Board
An advisory board may look very similar to the board of directors in some respects.
For example, some advisory boards:
- Attend all board meetings,
- Participate in discussions on important matters of the board of directors,
- And are composed of important stakeholders such as past directors and valuable donors.
In some situations, involvement in an advisory board may be the precursor to someday joining the board of directors. They to help fill in gaps of knowledge and break into new markets and industries.
Key Differences Between Board of Directors and Advisory Boards
Fiduciary Responsibilities
The fiduciary duty of a board of directors requires it to place the needs of the organization and its shareholders before the needs of its employees. Boards have all the power and authority for decision-making. They also have all the responsibility for the organization. Board directors can be removed collectively or individually. Some instances for removal include not giving due diligence to their responsibilities, or for neglecting them altogether.
A board of advisors has no such duty to the company. The advisory board’s top priority is directing, mentoring, and advising the CEO and management team. Additionally, an advisory board has no fiduciary responsibilities or liabilities.
Voting Rights
A board of directors has voting rights and the power to make changes in the organization. Members of the board of directors as a governing body vote upon major decisions. They even have the power to remove the CEO or make alterations in the executive management team.
On the other hand, advisory board members have no voting rights and are strictly consultative in nature. The board of directors team has no obligation to take the advice of their advisory board.
Nature of Advice
Advice given by an advisory board tends to be more specific to the actual changes happening in the company on an operational level. There is more active participation from board members on an advisory board, and there is a free flow of information and discussion.
The board of directors’ advice is more strategic and has a high-level focus. Shareholder value is a major consideration on the directory board and any decisions they make have a higher level of impact.
Expenses and Compensation
Board members often receive generous compensation because they have a fiduciary duty to the company. As a result, they can be held personally liable for mistakes. Therefore, securing or expanding a board of directors can be expensive, especially for smaller companies with limited means.
On the other hand, a board of advisors cannot be held liable for mistakes made in connection with their duties. Therefore, retaining an advisor requires less compensation. Members of an advisory board usually get paid through an equity interest in the company or through a small yearly stipend.
Easy to Create and Expand
A board of directors has legally defined responsibilities and is usually elected by the shareholders. They are also governed by the corporation’s bylaws. Therefore, the management team’s ability to create and expand its board of directors is restricted by law and corporate policy. In addition, directors are elected for established terms and may be difficult to remove.
An advisory board, on the other hand, is an informal group of hand-picked experts and advisors. It’s pretty easy to create, expand or decrease the size of an advisory board in order to meet the needs of the organization. Furthermore, members of a board of advisors can serve only as long as they are needed and can be easily replaced.
Clarifying Roles
There can be some confusion between the role of an advisory board and board of directors. This can happen as a result of situations where both groups are commonly referred to as “the board.” Additionally, the advisory board can start to act like the board of directors due to a lack of clarification or understanding about roles. So there are many reasons that both individuals on an advisory board and those on the board of directors should want written clarification about the advisory board’s role.
How to Choose Between the Two
Now that you have more information about each board team and the roles they play, you can evaluate the status and needs of your business. By aligning your company goals with what each board team has to offer, you can confidently make the best decision for your brand.
Both Board of Directors and Advisory boards are crucial to the success of an organization. Each has its own strengths and benefits. A board of directors can’t cover all the research and knowledge needed to help an organization. This is where advisory boards come to the rescue. By supplementing specific areas where the board requires expertise, advisory boards help leadership make better decisions and get more done.
Whether you are:
- Exploring the start of a new team,
- Realigning your company roles,
- Or reinventing your advisory board or board of directors,
Azul B2B is here for all of your business needs!
Your success is our success and we look forward to working with you. Schedule a consultation call today.