An advisory board is a collection of experienced professionals, both from within your industry, and from other industries, who provide advice and bring fresh perspectives to your business. They act as independent mentors who often have no financial interest in the business, although you can also set up an advisory board made up of investors in your business. It’s fairly common for a start-up or small business to set up an advisory board. Medium to large businesses also use such advisory boards to complement their board of directors and to provide an objective, third party perspective on the strategic direction of the business.
The role of an advisory board
An advisory board usually meets 2 to 4 times a year or as required by the business. An advisory board’s agenda is based on the needs of the business at the time, but generally revolves around the strategic direction of the business, rather than the day-to-day issues facing management. After discussing all of the issues, the advice given should be set out in minutes.
The steps to setting up an advisory board
It is important to set up the correct apparatus for the running of your advisory board. All advisory boards should have a Terms of Reference, which acts as a constitutional document setting out how the advisory board will be run. The document should also outline the need for confidentiality about the business’ operations. Each member of the advisory board should also be provided with a document explaining their role and the businesses’ expectations of them. These documents are usually drafted by a business solicitor, as they are legal documents. If you have an agreement in place, at the very least, you should have it reviewed by your business solicitor to ensure it is legally effective.
The legal issues associated with an advisory board
It is important to make sure your advisory board members do not hold any decision-making powers over the business. They should be acting in a purely advisory role. Where you are operating as a company, the board of directors should make sure they are exercising due diligence in relation to all decisions. Where a director solely relies upon the advice of the advisory board, they may be breaching the Corporations Act 2001 (Cth) and may be liable to certain penalties. Where an advisory board member is unduly influencing a director, he or she may become what is called a “de facto” or “shadow” director. When this occurs, the members of the advisory board may take on the same legal duties as the actual directors of the company and be liable for the same penalties if they do not meet these duties. Speak with a business solicitor if you’re unsure about whether an advisory board member is acting as a shadow director.
If you are thinking about setting up an advisory board, make sure your business solicitor clearly sets out what your board will and will not do. If you would like to speak with a business solicitor to discuss drafting an agreement between your company and your advisory board, contact LegalVision on 1300 544 755.