Every business needs leadership and direction and it is the Board of directors that provides this critical support base. The direction of any business can be easily ascertained from the composition and efficacy of the board. Many entrepreneurs have taken this issue for granted and this has resulted in failed businesses. But which do you need between Board of Directors and an Advisory Board?
It is not enough to have a board on paper, businesses must begin to activate their ‘boardrooms’ in order to maximize their capacity, potential, and profit.The boardroom is the place where strategic decisions are made, governance applied and risks supervised in order to maximize value and serve the interests of other stakeholders in a business.
It is imperative that the board consists of the right group of persons in the right combination in order for the board to function optimally. What are the key differences between a Board of Directors and an Advisory Board?
Corporation Vs Enterprise
Generally, the law requires every company to have at least two directors at the point of registration and throughout the existence of the company. However, where a business is registered as an enterprise, this legal requirement is not applicable. Whichever way, there is need for a group of people who will be responsible for charting the course of a business in terms of direction and management. They may either be in the form of a board of Directors or an advisory board. You may ask what the difference is between the two. Well, basically the former is the product of statute while the latter is not.
The Board of directors would usually be comprised of those who are directors of a company and as we have said earlier, directors are mandatory for any business registered as a company. But for an enterprise, what you would basically have is an advisory board which would perform similar functions as that of a board of directors.Non-governmental organizations also make use of advisory boards. It is pertinent to note at this point that a person need not be a shareholder of a company to be a director. A company can have just two shareholders and seven directors. The law allows persons who are not shareholders to be directors. Again, nothing stops a business with a formal board to have an advisory board as well if it is necessary.
A number of differences stem from the fact that the board of directors is a product of statute while an advisory board is not.
The key difference is that the statute provides procedures to be followed by directors in the exercise of their duties for an e.g. procedure for appointment, removal, meetings, resolutions etc. What this means is that the activities of directors are guided by the law i.e. Companies and Allied Matters Act, 2004, in Nigeria. Therefore it is quite rigid & formal compared to an advisory board which is more flexible and informal.
Additionally, the law also places certain expectations on Directors of companies which are referred to as duties, unlike the advisory board members. Thus a director has a duty of care and skill, fiduciary duty etc. and must, at all times act in the interest of the company. Where a director has an interest in a transaction, he must disclose it. Such requirements do not apply in the case of an advisory board although a person appointed as a member of an advisory board would be expected to act in the best interest of the business and not otherwise.
While a Board of directors would be expected to get compensated for their work, an advisory board would usually comprise of people who may be willing to provide services with little or no compensation compared to the formal director. With an advisory board, the advantage is that small businesses can leverage on relationships to form a strong team of advisers that could propel the business with minimal cost to the business
Tenure & Flexibility
Also, the Board of directors is more static and once set up would be more likely to remain so on the basis of tenure, unlike an advisory board which may be set up ad hoc for a specific purpose after which the board could be dissolved.
The disadvantage of an advisory board could be that those chosen to act as members of the advisory board may not be as committed as members of a formal Board of directors because the service rendered is compensation-free.
Focus on Skill/Competence
Also with an advisory board, the focus would be more on skill, competence, and the value that one can bring to bear on the business against Interest as might be the case for Board of Directors.
The issue of liability is minimal in the case of an advisory board, unlike a formal board. Under Nigerian corporate law and indeed in many other jurisdictions, directors can be liable for criminal or civil wrongs such as failure to comply with statutes and regulation like pension laws, corporate laws, anti-money laundering laws etc.
In terms of governance, the decisions reached by a board of directors has more ‘force’ and considered to be binding on the company unlike the case of an advisory board whose decision would be merely for the provision of guidance and non-binding.
In summary, every business should consider what would work best for it and ensure that some sort of leadership is in place to chart the path of the business. Many times the founders of a business alone would not be sufficient to drive the business towards attaining full potential. Although the founders have the primary burden to get this done, they could consider how they can get support towards achieving the organizational goals through the appointment of mentors and other skilled persons to serve as directors or advisers.