At Missouri Innovation Center, we offer the mentorship and resources required to build operational frameworks around great business ideas. Part of that is establishing proper governance structures to oversee the establishment and growth of a business.
While it’s easy to understand the roles of, say, a CEO or Director of HR, some leadership structures are more confusing. If you’re unsure about the composition and responsibilities of a board of directors as opposed to a board of advisors, this resource is designed to provide definition, clarity, benefits, and best practices regarding these two important areas of business oversight and leadership.
Boards of Directors: Legal Structure and Responsibilities
A board of directors is a legal entity with critical oversight and responsibility over the governance of a company. It is responsible for financial oversight, compliance, risk management, and helping to make strategic decisions.
These are typically broken down into detailed and well-defined roles, such as fiduciary responsibility, which includes categories like duty of care (prudence) or duty of loyalty (prioritizing organizational interests). A board of directors must be careful to comply with all laws, regulations, and corporate bylaws while executing these functions.
Board members are former members of an organization who are held personally liable for things like misconduct or negligence. They exercise voting rights and must adhere to formal meeting and documentation requirements, such as quarterly meetings or maintaining minutes.
Boards of Advisors: Role and Purpose
In contrast to a board of directors, a board of advisors functions as an informal, non-binding group. It does not have any legal responsibility for organizational finances or compliance. Members can offer guidance, expertise, and mentorship, although they do not have formal roles or responsibilities in the operation and decision-making processes.
The lack of legal requirements makes a board of advisors a more flexible group, both as it pertains to membership and operation. As an unregulated group, each board of advisors can follow customized functions, and its members can fill unique or circumstantial roles. A board of advisors can focus on strategic, high-level guidance and can meet as needed.
Key Differences in the Composition of a Board of Directors and Board of Advisors
The considerable differences in the form and function of a board of directors compared to a board of advisors make the selection and composition of each group quite different. Here are a few of the key factors to consider:
- A board of directors is formally elected by either stakeholders or shareholders, whereas a board of advisors can be informally appointed.
- Directors tend to need specific financial, legal, or other governance training. Advisors are often chosen based on experience or expertise.
- A board of directors should be structured and numbered based on regulatory specifications (often containing around 12 total individuals, although many boards are smaller). Advisory boards are designed to meet organizational needs and can vary widely in number and structure.
- Directors are hired with fixed terms and clear legal obligations. Advisors lack these binding duties and are often appointed for flexible, shorter stints.
- Directors receive clear compensation packages, such as salaries, stipends, or stock options. Advisors are compensated on an unstructured basis and may even be unpaid or receive a simple honorarium or equity incentive.
- Directors are given legal decision-making powers and are expected to exercise them when necessary. Advisors offer more broad, experiential, mentorship-focused advice.
- Directors are held accountable for decisions and have agency in the trajectory of a company. Advisors offer advice and can influence but are not legally (or even generally) held accountable for the actual day-to-day decisions they impact.
In all cases, an advisor is the more flexible option, whereas a director must adhere to specific organizational and regulatory guidelines.
Benefits of Directors vs Advisors
There are clear applications and benefits for both a board of directors and a board of advisors. Here are some of the most obvious advantages to each group.
Benefits of Board of Directors
A board of directors:
- Provides a shared and accountable sense of legal oversight and governance.
- Prioritizes shareholder guidance and represents their best interests.
- Considers the implications and implementation of present and future regulatory compliance.
- Provides strategic direction aimed at creating specific results, such as growth or increased revenue.
Benefits of Advisory Board
A board of advisors:
- Provides a flexible, scalable, and deep source of expertise across as many fields and areas of advice as desired.
- Comes with industry connections, networks, and reputational prestige.
- Offers mentorship opportunities that cultivate future leadership and expertise within internal organizational pipelines.
- Reduces administrative burdens through shared advice and group guidance.
Practical Considerations for Businesses
When companies are considering establishing a board of directors or a board of advisors, here are some questions to ask regarding which one is right for your situation.
When should you establish each type of board?
A board of directors is critical to legal governance in a corporate setting. A board of advisors can be helpful with initiating growth or establishing strategic guidance without the need for formal oversight for leadership.
What are the cost implications involved?
A board of directors comes with fixed (and generally higher) cost implications. A board of advisors brings more flexibility and lower costs to the table.
What are the time and resource requirements required?
A director will need to commit to significant time, whereas an advisor can provide occasional input. The former has a more dramatic influence on the time and resources of both its members and your company.
How does either board integrate with your business strategy?
Is there a strategic advantage to creating a board of directors (such as incorporating a business) or a board of advisors (such as accessing industry expertise)?
Building a Board for Your Startup
As your startup grows, consider the advantages and disadvantages of a board of directors compared to a board of advisors. Once you’ve chosen the right fit for your growing company, keep best practices in mind, too, including:
- Careful selection based on director vs advisor criteria.
- Meeting structure and frequency.
- Communication protocols and performance evaluation.
- Conflict resolution measures.
Whether you’re looking for a board of directors to meet legal requirements or a board of advisors to provide soft guidance and key insights to a growing company, make sure you invest in these areas thoughtfully. Choose the board that meets your company’s needs and growth goals at the moment, and then staff it with properly vetted, well-qualified individuals who can positively contribute to your company throughout their tenure.
