Understanding the Role of Advisory Boards

There has been increasing interest in recent years in the appointment of advisory boards to assist both large and small, public and private companies in their month to month business decisions and in helping with strategic direction.

The key distinctions to be made between an advisory board and a board of directors are as follows:

The primary difference is the fiduciary responsibility. An advisory board has none. Whereas, the corporations law covers the board of directors responsibilities. As a result, members of a board of directors are registered with ASIC, and the information available to the public, whereas advisory boards are private and have no specific governance requirements;

The CEO or board is not compelled to act on any of the advice given by the advisory board, whereas the actions of the board have direct relevance on the company based on the legal responsibilities to the company’s stakeholders; and

The nature of advice provided by an advisory board can be more operationally specific. They tend to be there to help fill a knowledge gap rather than a governance role as per the board. There is also an argument that because of the lack of fiduciary responsibility, advisory boards will give more candid and insightful advice. A word of caution here, as advisory boards can evolve into decision making groups and as such, its members may become ’shadow Directors’ with similar responsibilities and liabilities to that of directors.

So why have advisory boards in the first place?