Board of Advisors vs Board of Directors: Which one is best for your company?

One of the questions that always comes up in most of our interactions with founders is whether they should consider an advisory board or a board of directors. Forming boards is a big decision, as it invites a significant mindset shift by a founder - from solely coming up with solutions to all problems thrown their way, to now embracing input from others to inform their decisions. In this article, we will consider the key differences between a board of advisors and a board of directors.

But first some definitions of terms:

A Board of Advisors comprises external individuals who offer their expertise and guidance to a company's leadership team and executives. Unlike a Board of Directors, an Advisory Board lacks legal authority over an organization's operations, and its members do not have fiduciary duties towards shareholders. Instead, they serve as valuable resources for strategic decision-making.

On the other hand, a Board of Directors, often referred to simply as a "Board," is a formal governing body responsible for making key decisions on behalf of a company or organization. This includes setting strategic direction, appointing top executives, and ensuring compliance with laws and regulations. Unlike an Advisory Board, a Board of Directors wields substantial legal authority and fiduciary duties.

Here are additional key differences between the two:

Composition and structure

A board of advisors comprises individuals with specific skills and diverse experiences or expertise that the business needs. The number of advisors varies depending on the size of the business, with smaller and less complex businesses needing no more than 3-5 advisors, preferably with multiple skills. The structure of an advisory board is less formal, with meetings held less often like quarterly or semi-annually.

A board of directors comprises both internal and external directors. Internal members include the Managing Director who is part of the executive team, while external members include non-executive directors elected to represent different stakeholders on the board. The structure of a board of directors is formal, with regularly scheduled meetings (often monthly), established governance processes, and strict compliance with corporate laws and regulations.?

Fiduciary responsibilities

Fiduciary responsibility, which is the (legal) duty to act in the best interest of another party,? is perhaps the biggest differentiator between the two bodies.?

A board of directors is financially liable for its advice to the business, meaning it has to carefully weigh its advice and decisions to ensure they are made in the best interest of the business. A board of directors' advice and decisions are binding and must be obeyed.

A board of advisors does not carry such fiduciary responsibilities, should the founder decide to take their advice. Conversely, a founder is not bound to heed the advice of a board of advisors.

Nature of advice

A board of advisors' key role is to offer expert advice and insights to the leadership of the business.? Well-constituted advisory boards will include industry experts, seasoned professionals, and individuals with unique skills and knowledge relevant to the business sector. Board of advisors therefore tend to have more engaging discourse on matters brought before them, knowing their advice is non-binding and leadership is at liberty to either heed their advice or not. Lastly, advice tends to be more tactical and specific to a particular problem with potential hands-on support to the leadership on execution.

A board of directors' key role is to provide oversight on business performance and compliance.? The nature of advice therefore tends to be strategic and focused on high-level aspects of maximizing shareholder value while acting in the best interest of the company and compliance with existing laws and regulations.? Perhaps more instructive to note is that directors on a board can make binding decisions for the company which the executive must obey.??

The why:

Knowing why you need a board goes a long way in determining what kind of board to constitute. Listed companies have a statutory obligation to constitute a governing board of directors.? Private, founder-led businesses and public benefit organizations form boards out of the founder’s initiative. Thinking carefully about the purpose of the board will ensure that it will be structured to maximize its contribution to the business.

A rose by any name:

As a founder, you may go all out and appoint a board of directors, listed with the regulator and with fiduciary responsibilities giving them authority to make decisions, and still treat the board as flower girls who rubber stamp your decisions.?

On the other hand, another founder can carefully consider the skills mix of who they appoint to their advisory board, meaningfully engage them in improving the quality of the founder’s decisions, and invite the advisory board to hold them accountable in following through with decisions.

Ultimately, it boils down to how a founder wishes to engage the board, whether it is advisory or not.

Founders Freedom works with founders to build businesses that can run in their absence and last generations. Get in touch by sending us a DM or writing to us at [email protected].

By: Martin Mutuku, MIoD (K), Founders Freedom