The quality of a growing financial services company’s executive and management team and the staff selected by that team are critical to your growing company’s long term success and to meeting growth objectives. But who can the senior management team turn to for advice and guidance? For most growing companies, the answer is two fold: (a) a formal Board of Directors and (b) an informal Advisory Board (or series of advisory boards for specific purposes).
These two boards have very different responsibilities. A board of directors is required under virtually all applicable state corporate laws and owes very specific fiduciary duties to the shareholders. The directors set broad goals and policy objectives for the company that will benefit and protect the interests of the shareholders; it is incumbent on the officers to develop and implement plans to meet these goals. A strong director has board-based business experience, strong industry knowledge, a useful Rolodex, adequate time and the objectivity to challenge decisions made by the management team. A good director does not get easily discouraged if the company gets off course nor does he or she view the world through rose-colored glasses. Each board member and the board as a whole must be constantly guided by “What is in the best interest of our shareholders?”
An advisory board is not required by state corporate laws, does not owe the same levels of fiduciary duties to the shareholders (and hence cannot generally be held as responsible for their acts or recommendations) and can be much more informal with regard to the number of meetings and agendas for meetings. An advisory board can also be an excellent way to get a second opinion on certain matters without interrupting existing relationships. Entrepreneurs will often set up an advisory board in connection with the capital formation process in order to demonstrate to prospective investors in the business plan that the officers of the company has access to a credible and objective source of advice and contacts, without filling up precious board of director seats. The board of directors seats are usually initially set aside for co-founders and investors and many prospective advisory board members may be reluctant to accept the responsibility that comes with a board of director seat, especially at the outset of the relationship. Prospective investors will put varying weights on the strength and composition of the board of advisors in making their final investment decisions and will often want direct access to the advisory board members as part of their due diligence process and to ascertain the depth of their commitment.
One critical difference between a board of directors and an advisory board is the management’s ability to accept or ignore the recommendations of any advisory board, a worry they do not have when a mandate comes down from the board of directors. Also, because members of the advisory board do not owe the same duties to the company and its shareholders, they can be used on mediating disputes by and among the officers or and between the officers and the directors. They can also be used in identifying potential board of director candidates or be a recruiting ground for eventual seats on the board.
Since the rules governing the board of advisors are not set forth in a corporate law statute, it is critical to be very clear as to your expectations of each advisory board member and how they will be compensated for their efforts. The best way to capture these objectives and rewards is to prepare an advisory board member.
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