Establishing an advisory board can be a cost-effective way for your business to obtain strategic advice. In recent years many startups have been relying on advisory boards to get free experienced advice. This article explores some essentials to consider before setting up and selecting an advisory board.
What is an Advisory Board?
An advisory board is a committee of people selected by a business to provide advice and guidance on organisational matters. Unlike the board of directors, an advisory board has no authority or fiduciary responsibilities. This means their advice is non-binding and does not create any legal obligations for your business.
Why Does Your Business Need An Advisory Board?
Many business experts and industry leaders are willing to volunteer some of their time to help new companies. However, before recruiting members for an advisory board, you should decide what type of strategic advice your company requires. This is dependent, of course, on the nature of your business and the goals you have for your business. Each business should pick the members of the advisory board based on its particular needs and circumstances.
Continue reading this article below the formFinding Your Advisory Board Members
You can approach anyone to be an advisory board member.
One way to identify advisors is to tell everyone in your network that you are dealing with an issue and are seeking a solution. This could be done through a LinkedIn post, email, or in conversation.
You will likely be surprised by the unique expertise of people in your network or the connections they may have. By allowing individuals in your network to organically offer their advice (without any promise of payment), you know that they are genuinely interested in your business and in solving your problem.
You should also leverage the networks of your employees and your business management team. Your existing team is familiar with your business and understands your strengths and weaknesses from a different perspective. Likewise, they may have industry connections who could provide real value as an advisor.
Choosing Your Advisory Board Members
A good suggestion is to choose a diverse group of members who can assist you in different fields and work together to provide your company with valuable strategic advice. It is important that your members are committed to your business.
Members should be people that have competence and expertise in an area that is valuable to your business, and they should also be people that you respect and believe can provide a fresh perspective.
It is important to be selective when choosing advisors. Reflect on the individual’s history, and ask yourself the following questions:
- Do they have experience in your industry?
- Have they successfully navigated the challenges you are facing in the past?
- Can they point to any previous accomplishments which they have advised on?
- Are they willing and able to invest their time and energy into your business?
Once someone has agreed to become a member of the advisory board, remember to send them a formal invitation letter.
Advisory Board Members Are Not Directors
Members of your advisory board are not directors and can only provide advice. Notably, your board and management team are not obliged to follow this advice. The advisory board is essentially a discussion and learning forum where your business can obtain operational and strategic advice from diverse people. In other words, an advisory board is not a decision-making body.
Your business will have its own board of directors who make binding decisions on behalf of the company. Your advisory board is there to assist through counselling and advice and may provide directors and management with ideas to assist in their day-to-day operations. Still, they are not a replacement for a board of directors.
Additionally, advisory board members have no voting power or authority to make decisions. It is important to be aware that sometimes the experience and knowledge of the advisory board can be quite intimidating, and directors of a company may feel pressured to substitute their decision-making with suggestions from the advisory board. However, this can be problematic as a director’s failure to make their own decisions may breach their fiduciary and statutory duties to the company. To mitigate this problem, you need to make it clear that advisory board members have no powers or legal duties to the company, and directors must make their own decisions based on the insights provided by the advisory board.
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Sign an Agreement With the Members
As with setting up a business, setting up an advisory board requires a number of documents. You should share with advisors two key legal documents –
1. Terms of Reference
This is an introduction to and an overview of the advisory board. This includes details such as the purpose and protocols of the board.
2. Advisory Board Agreement
This is the formal legal agreement between the company and each member of the advisory board.
This agreement will set out:
- the purpose of the advisory board;
- the structure of the advisory board;
- responsibilities of each member; and
- whether there will be a chair, coordinator and secretary, and their respective responsibilities.
The agreement should also detail how frequently the advisory board is to meet and whether they are invited to participate in any other events of the business. This agreement should be signed by each member of the advisory board.
It is important to make sure appropriate documentation is in place, so everyone is clear about the expectations of their role. This helps to mitigate any potential disputes down the track and ensures the success of the advisory board and company relationship.
Key Takeaways
An advisory board is a body of experienced business people that advise the management of an organisation. They are a great way for your business to obtain knowledge and expertise from more experienced business people or others with specialist knowledge.
If you are thinking about setting up an advisory board for your business, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Advisory boards can be a great way for a business to obtain knowledge and expertise from more experienced business people or others who have specialist knowledge in the realm that the business operates in. There are no additional duties and responsibilities that come with appointing a director to the company’s board.
This is a conversation to have with incoming members, as different people may have different expectations. Often, it will come down to what your business can afford balanced against what will be attractive to the advisory board member. Many board advisors will voluntarily give their time to early-stage companies (with expenses covered).
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