Board of Directors vs. Advisory Board: What’s the Difference?
Not sure what the difference is between an advisory board and a board of directors? Don’t worry, you’re not alone! While there are some overlaps, it’s important that every business leader understands the specifics of each. This is especially true as your brand grows and expands. If you’re looking for funding and expert advice, either of these options may be the perfect choice. However, you’ll need to know what you’re looking for, and what each can deliver.
By creating either of these boards, you’ll be selecting outsiders to help drive your business growth. You’ll need to have trust in their skill and and their knowledge level of your industry and your company’s needs. And you’ll also need to have faith in their ability to give your brand the attention it deserves.
“One thing that you don’t want on either of these boards is a yes-man or someone who is going to phone it in,” explains James McClung, Chairman & CEO of Lismore International, a global advisory firm. “Board members of any kind should be willing and able to do research before each meeting, and be unafraid to tell you the hard truths as they see them. They should come ready to contribute and emotionally invest in the brand.”
I sat down with McClung to talk through the differences between boards of directors and advisory boards, and when each is appropriate. Here is his advice for every new business leader.
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Board of Directors
A board of directors is officially defined by Investopedia as a “group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues.” Publicly traded companies are required to have one, but many private companies choose to create one as well, for a number of reasons.
What They Do
Boards of directors exist to serve as oversight over the whole company from a high level. They’re able to hire and fire top executives, create and amend dividend policies, and set executive compensation. They also are often involved in setting broad company goals. They acquire and maintain company resources and establish governance policies and practices as well.
Should You Have One?
Creating a board of directors can be extremely helpful. This is especially true for brands that are growing steadily and moving large sums of money around. Additionally, directors can impose corporate governance before an issue arises.
The common fears attributed to them all stem from the level of power they wield over the company and its executives. However, if you’re looking for a board with fiduciary responsibilities that can act as a check for executive management, a board of directors fits your needs.
An advisory board is different from a board of directors in many ways. However, it can be just as beneficial. This is especially true for small brands or those whose founders want to keep total control, but who are looking for guidance and connections from more experienced professionals. Their job is to offer strategic advice, but they wield no power to force the company or its executives to do anything.
What They Do
“Advisors are much closer to consultants than many realize,” explains McClung. “Because their advice is non-binding, their job is really to come in and act as a sounding board for the executive leadership. This is especially helpful for CEOs who wouldn’t want to ask for advice from their teams about long term company plans, but want to talk through decisions before they’re made. For those executives who are looking for outside advice from trusted sources, but who want to retain their ability to veto suggestions, an advisory board can be a highly attractive choice.”
Additionally, like consultants, their fees are usually only compensation for the day, or perhaps a few days to allow them to conduct research before a meeting. This is unlike directors, who invest in the company and own stock in it. This makes an advisory board a much more affordable option, as their fee is by the day.
Should You Have One?
If you’re looking for a group of respected professionals to bounce ideas off of so that you don’t pass your stress down to your management teams, an advisory board is the perfect choice. This is especially true for founders who are hesitant to give up ownership of their brand. Additionally, this is a good option if you foresee rapid growth, as this can make the value of stock options difficult to forecast.
Additionally, there are no real downsides to having an advisory board. Choose people for your board whom you trust and who have the skill sets you need. Ensure that they are willing to listen to you. Then they can be an extraordinary aid to the growth of your brand.
Creating either type of board lends immediate legitimacy to your brand. It indicates that experienced professionals are guiding the fate of your company. And it shows that your executive leadership is mature enough to welcome them to do so.