Advisory boards are not covered by the Corporations Act 2001 or corporate governance codes, which contributes to their latitude.

How is an advisory board different to an ordinary board?

Directors of a company’s main board have fiduciary duties, e.g. a responsibility to act in good faith in the best interests of the company and for a proper purpose. These duties are set out in ss 180-183 of the Corporations Act 2001. The main board is responsible for company performance and conformance with legal and regulatory requirements. Directors can be held legally liable for not fulfilling these duties.

Members of an advisory board, on the other hand, are not 'directors' as defined in the Corporations Act 2001. Their role is not defined in the Corporations Act 2001 and members owe no fiduciary duties to the company or shareholders. Roles will vary between companies but generally relate to providing objective advice on strategic aims. They have no authority to act on behalf of the company.

While they technically have no legal liability, it is advisable to confirm the role of advisory board members in a charter stating the limitations on their authority and the non-binding nature of their advice to avoid confusion between the roles.

What are the roles and responsibilities of advisory boards?

Each company will determine the roles and responsibilities of its advisory board to best suit its particular circumstances and needs. These roles, responsibilities and expectations of the advisory board should be formalised in a charter which is ratified by the main board. Because there is no legal or formal definition for advisory boards, the company can structure this board in the most appropriate fashion.

Companies must be clear on the purpose of the advisory board and what they hope it will achieve. This will help determine the skills, knowledge and experience needed and assist in the selection of members of the advisory board. Effective communication of a clearly defined purpose will contribute to the success of the advisory board.

Advisory boards are generally created to focus on the big picture – strategic issues and industry and market trends. Their principal roles are to provide objective advice and contribute to strategic planning. Good advisers can give fresh insights and thinking on emerging or unfamiliar issues, respond to ideas from management, play devil’s advocate and supply high quality objective advice to support the main board’s decision-making. Many advisers are selected because of their contacts and their ability to facilitate introductions to potential suppliers, customers etc.

Other roles and responsibilities for advisory board members might include:

  • Develop an understanding of the business, market and industry trends;
  • Provide “wise counsel” on issues raised by the owners/directors or management;
  • Provide the directors and management with insights and ideas which can only come with distance from the day-to-day operations;
  • Encourage and support the exploration of new business ideas;
  • Act as a resource for executives;
  • Monitor business performance and challenge the directors and management to consider options for improving the business.

The ultimate aim of having an advisory board is value creation. If the advisory board is not creating value, then reconsider who sits on it or whether having one is the best means of achieving the purpose. An advisory board adds value when there is an appropriate mix of people and there is open, frank and free-flowing discussion.

What are the benefits of having an advisory board?

Having an advisory board brings numerous benefits to the company when the advisory board is working effectively. Benefits may include;

  • Drawing on the skills and knowledge of directors/advisers who have practical experience in growing a business;
  • Enhance the company’s reputation and credibility in the marketplace;
  • Increase consumer and investor confidence;
  • Attract superior employees by demonstrating a commitment to company growth;
  • Lower risk (for both parties) than appointment as a director.

An added benefit is that the advisory board may in the longer term be a source of potential directors for the main board. The advantage is that these people are familiar with the company, its strategic objectives and key people, and could make a meaningful contribution early on in their appointment.

In family companies, setting up an advisory board can be a way to test the quality of contribution that can be made by outsiders and could be a precursor to appointing an outsider to the main board.

When would a company need an advisory board?

There are many situations in which an advisory board may prove valuable to a company. For instance:

  • Guiding startup companies in a rapid growth phase
  • Creating a new product line;
  • Moving into a new market segment or industry;
  • Moving into a new geographic area;
  • Making the transition from private to public and perhaps listing on a stock exchange;
  • Restructuring and repositioning a company in the market;
  • Implementing major new technology within the organisation;
  • Staving off a serious competitive threat;
  • Analysing a potential takeover target.

In other cases a company may recognise that it would benefit from external knowledge on an ongoing basis but needs to minimise costs. An advisory board may be a better value proposition than employing consultants.

Who sits on advisory boards? How do you find them?

In other cases a company may recognise that it would benefit from external knowledge on an ongoing basis but needs to minimise costs. An advisory board may be a better value proposition than employing consultants.

Typical members of advisory boards include:

  • Legal advisor;
  • Accountant;
  • Marketing expert;
  • HR expert;
  • Financial advisor;
  • Entrepreneur;
  • Industry expert.

What legal liabilities exist for members of advisory boards?

The directors of a company’s main board owe duties of good faith and care to the company and can be liable if they fail to meet these obligations. Technically, advisory board members do not owe these duties as they are not directors. This may make involvement in such a board an attractive proposition to a candidate.

However, caution should still be exercised. Without clear lines of demarcation between the roles of the advisory and main board, there may be circumstances where a court thinks that the main board relies on the advice of the advisory board without giving it due analysis and consideration, particularly if there is a negative outcome for the owners of the company. This may lead to accusations that the advisory board members are acting as shadow or de facto directors. A shadow director or a de-facto director is deemed by the Corporations Act 2001 to be a 'director' and will be liable for breaches of directors' duties.

A de-facto director is a person who is not actually appointed as a director but acts as if he or she were (often incorrectly believing that he or she has been properly appointed as a director). In some cases, informal involvement in the decision-making of a company can lead to a de facto directorship (see discussion by Professor R Baxt, 'When you might be seen as a de facto director', Company Director, July 2012).

A shadow director is also not appointed as a director but is a person on whose instructions or wishes a company’s board members are accustomed to act. These are understandably complex areas which advisory boards wish to avoid.

Creating a formal charter outlining duties and responsibilities of the advisory board will help to properly distinguish its role from that of the main board. This minimises the chances of liability for advisory board members. The charter should include statements about the advisory board members not being appointed ‘directors’ and having no authority to act on behalf of the company or to make decisions. The charter should also clearly state that the advice given is non-binding. Directors on the main board are still expected to discuss, debate and decide on a course of action themselves, having considered the advice of the advisory board. This charter should be ratified by the main board.

Advisory board members should only attend main board meetings when presenting their advice. They should not be present for the board’s decision making.

To protect the company, the advisory board members should be acting in the best interests of the company and not for personal gain. Their agreement with the company should include a condition requiring disclosure of potential conflicts of interest. They will also be privy to sensitive company information so signing a confidentiality agreement should be considered too.

Potential advisory board members should do a similar level of due diligence on the company as they would when joining a main board, because they may have little access to limited liability, indemnification or insurance on an advisory board as these generally apply to a company’s ‘directors’ and ‘officers’.

When establishing an advisory board, expectations must be clearly communicated to the members:

  • What will the term of office be, e.g. 12 or 24 months?
  • What is the expected time commitment?
  • What is the expected contribution of each member?
  • How frequently will meetings be held? This will depend on the issues that the advisory board is helping with. Some may require monthly meetings while other issues may be better suited to quarterly or 6-monthly meetings.
  • What is being offered in return?

These matters can be captured in a letter of appointment.

Advisers may feel that their time is being wasted if the advisory board is not well organised. Meetings should be run efficiently and effectively:

  • Prepare an agenda and seek input from participants;
  • Distribute information in advance;
  • Stick to time when running the meeting;
  • Follow up on actions;
  • Keep minutes;
  • Keep members informed of developments and activities between meetings.

Keeping minutes can be a useful way of confirming that the advisory board’s role is purely advisory and that they are not acting on behalf of the company or making decisions.

Should advisory board members be paid?

This is a matter for each organisation to decide for themselves. Some organisations may reimburse advisory board members for out of pocket expenses; some may provide a good lunch; others may pay per meeting attended; others may pay a retainer. Some companies such as startups may offer options in the company. At the very least, expenses to attend meetings should be covered.

Advisory board members will benefit in non-financial ways from their involvement. They will become exposed to new ideas, expand their networks, use their skills and knowledge in new ways without the burden of fiduciary duties and possibly enhance their credibility if associated with influential people on an advisory board.

Further Reading

R Baxt, 'When you might be seen as a de facto director', Company Director, July 2012

B McLaughlin and A Abelson, 'The dangers of advisory boards', Company Director, August 2008

Feedback

We encourage members to provide feedback by emailing library@aicd.com.au

Updated January 2013


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