Advantages of a Board of Advisors vs. a Board of Directors

In today’s competitive business environment, organizations frequently seek outside expertise to help the company grow and prosper. Traditionally, companies seeking external advice invite advisors to join their Board of Directors. However, the formality, liability and expense of a Board of Directors fuels the popularity of an informal, budget-friendly alternative: a Board of Advisors.

A board of advisors is a team of people appointed to guide, counsel and advise a company’s CEO and business leaders. Businesses of all sizes can benefit from developing their own team of external advisors. A board of advisors is particularly useful in start-up and small companies, providing fresh ideas and unique perspectives to a growing organization. Advisors from different disciplines can complement the strengths and expertise of the organization’s in-house leaders and provide broader management knowledge. An advisory board can also enhance an organization’s credibility with clients and investors and expand a company’s networking contacts.

A board of advisors holds many advantages over a traditional board of directors. A board of advisors is:

Easy to Create and Expand
A board of directors has legally defined responsibilities and is usually elected by the shareholders and governed by the corporation’s bylaws. Therefore, the management team’s ability to create and expand its board of directors is restricted by law and corporate policy. Moreover, directors are elected for established terms and may be difficult to remove.

An advisory board, on the other hand, is informal group of experts and advisors hand-picked by the CEO and management team. It is relatively easy to create, expand or decrease the size of an advisory board in order to meet the needs of the organization. Moreover, members of a board of advisors can be recruited to serve only as long as they are needed and can be easily replaced.

Less Costly
Since a board of directors has a fiduciary duty to the company and can be held personally liable for mistakes, board members often receive generous compensation. Therefore, securing or expanding a board of directors can be expensive, especially for smaller companies with limited means.

On the other hand, a board of advisors cannot be held liable for mistakes made in connection with their duties and, therefore, less compensation is required to retain an advisor. Members of an advisory board are usually compensated through an equity interest in the company or through a small yearly stipend.

Beholden to the Management Team
The fiduciary duty of a board of directors requires it to place the needs of the organization and its shareholders before the needs of its employees. Conversely, a board of advisors has no such duty to the company; directing, mentoring and advising the CEO and management team are the advisory board’s foremost priority.

Not Liable To the Company and Shareholders
Companies frequently obtain Directors & Officers Liability (D&O) Insurance to indemnify directors against claims from shareholders, employees and clients. Sarbanes-Oxley and other recent legislation have raised the accountability of corporate directors, increasing the risk that they will be found liable for acts performed connection with their duties. As a result, the cost of D&O insurance has become prohibitively expensive for small companies. Employing a board of advisors instead of a board of directors eliminates the need for costly D&O insurance.