This article is the second of a three-part series. Read Part I – The Purpose of an Advisory Board and What It Can Do for You
I love the saying, “if you want to go fast, go alone; but if you want to go far, go together.” It’s so true, especially when you want to scale. An advisory group is essential when your business hits a plateau or you’re struggling to meet ambitious goals. Pushing past your upper limit requires new perspectives, fresh insights, and leveraging others’ experience and skill sets. You know what an advisory board is, but it’s not your only option – you may also want to consider a board of directors. So, what’s the difference? And which would most benefit you? Understanding the distinctions between these two groups can help you determine which one is the best fit for what you want to accomplish. Let’s check out the pros and cons of an advisory board vs board of directors.
Roles and Responsibilities of an Advisory Board vs. Board of Directors
The roles and responsibilities of an advisory board and a board of directors differ significantly. An advisory board is a group of individuals who provide guidance to you or your company’s leadership team. Advisors are informal – they do not have any legal or fiduciary responsibilities and do not make any decisions for the company. As the name implies, they are put in place to offer advice.
On the other hand, a board of directors is responsible for making major decisions for a company, such as setting strategic goals, hiring and firing executives, and overseeing financial performance. Public companies and incorporated nonprofits, for example, are required to form boards of directors to guide decision-making and provide oversight. Boards of directors have legal and fiduciary responsibilities to the company and its shareholders.
Advisory Board: Benefits and Drawbacks
An advisory board can provide valuable insights and expertise to a company without the legal and fiduciary responsibilities of a board of directors. They can offer guidance on specific issues or projects and can be more flexible in terms of meeting frequency and structure. They do not have the authority to make decisions for the company – which may be appealing to entrepreneurs wishing to retain control.
However, they don’t have the same level of accountability as a board of directors, and advisory board members may not have the same level of commitment or investment in the company as board of director members.
- Flexibility – Since advisory board members don’t have any legal responsibilities, they can be more flexible in terms of meeting frequency and structure. This can be helpful if you’re a small business with limited resources.
- Guidance and expertise – Advisory board members can offer valuable insights and expertise to a company, without taking away your control. They can help you make informed decisions and avoid common pitfalls.
- Networking opportunities – Advisors can introduce you to key players in your industry or help you expand your network. They may also have connections to potential investors or partners.
- Lower costs – Since advisory board members aren’t legally accountable, they may be willing to serve on your board for a lower cost than a board of directors.
- Low accountability – Advisory board members don’t have any legal or fiduciary responsibilities, which means they may not be as invested or committed to the company as board of director members.
- Limited authority – Advisors can offer guidance, but they don’t have the authority to make decisions for the company. This means that you’ll still have to make the final call on major decisions, which you might or might not find appealing.
Board of Directors: Benefits and Drawbacks
A board of directors have the authority to make decisions for the company and are accountable for those decisions. They have legal and fiduciary responsibilities to the company and its shareholders. This power and responsibility mean that board members are typically more invested in the company and have a greater level of commitment. Additionally, if you’re nearing retirement and want someone else to take over succession planning and replacing you and your expertise, a board of directors can guide this process.
However, a board of directors can be more rigid in terms of meeting frequency and structure and may not offer the same level of flexibility as an advisory board. In some cases, a board of directors can make changes and choices you don’t agree with and even has the power to remove executives (including you). Additionally, the legal and financial responsibilities of a board of directors can be a significant burden for small- and mid-size businesses.
- Legal and financial accountability – Board members are legally accountable for their decisions, which can provide a level of security and stability to the company. They also have fiduciary responsibilities to the company and its shareholders.
- Greater commitment – Since board members are legally accountable, they may be more invested and committed to the company’s success. This can be especially helpful if you’re looking for long-term growth and stability.
- Greater authority – Board members have the authority to make decisions for the company, which can be helpful if you’re looking for someone to take charge and make tough calls.
- Succession planning – a board of directors can be instrumental in moving the company forward as you prepare for retirement or pursue other interests.
- Rigid structure – Boards of directors can be more rigid in terms of meeting frequency and structure, which can be difficult for small businesses with limited resources.
- High costs – Since board members are legally accountable, they may require a higher compensation package than advisory board members. Legal costs for drawing up documents and agreements are also prohibitive.
- Potential conflicts of interest – Board members may have conflicts of interest or competing priorities that could affect their decision-making.
- Not seeing eye-toe-eye – A board of directors may ultimately choose to move your company in a different direction. And, if you do not meet certain job expectations, executives – including you – can be removed or fired.
Choosing the Right Board for Your Business
When it comes to choosing between an advisory board and a board of directors, there is no one-size-fits-all answer. It ultimately depends on the needs and goals of your business. If you’re looking for more flexibility and guidance, an advisory board may be the better choice. However, if you’re seeking legal and financial accountability, a board of directors may be necessary. Consider the size and stage of your business, as well as your long-term goals, before making a decision. It may help to seek advice from trusted advisors and legal professionals to make the right choice.
How to Build and Maintain a Successful Board
Building and maintaining a successful board, whether it be an advisory board or board of directors, requires careful consideration and planning. Start by identifying the skills and expertise your board needs to have to support your business goals – this typically means finding professionals with skills that complement your leadership team and round out expertise you don’t currently have in-house.
When approaching prospective advisory board or board of director members:
- share your vision for the future and the areas in which you need support
- find out why they are passionate about your industry and company and if they’ve served on a board in the past
- ask what they hope to bring to your advisory board and what they’d like to get out of the experience
- confirm that they are interested in helping you make the right connections and decisions
- set expectations for time commitment and meeting frequency
- let them know when you’ll need a decision
Look for individuals who have experience in your industry, as well as those with diverse backgrounds and perspectives. Once you have your board in place, it’s important to establish clear expectations and communication channels. Regularly evaluate the performance of your board members and adjust as needed. Remember, a successful board can be an asset to your business, providing guidance, support, and accountability.
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