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This article is Part 4 in our 5 part series about advisory boards. Part 1 explains what an advisory board is, Part 2 explains why you may have an advisory board, Part 3 discusses selecting the board, and Part 5 explains the legal documents required.

The knowledge of experienced business people who want to see you and your company succeed is an incredible asset to your business. Traditionally, the board of directors serve this purpose, providing wisdom and guidance from their respective industry experience. However, new businesses are increasingly seeking specialised and targeted guidance by forming an advisory board composed of industry or business experts.

An advisory board is an informal panel of independent people who give non-binding strategic or technical advice to business owners and founders. One of the key concerns of advisory board members is that they are not a ‘shadow director’. If they were, it would cause them to inadvertently assume the role of director. This situation is problematic, as directors have specific duties and responsibilities at law. However, advisory board members are not subject to these same requirements. Therefore, if an advisory board member acts as a shadow director, they could become exposed to the director’s liability under the Corporations Act Cth (2001) (Corporations Act) and general law.

This article discusses the key differences between an advisory board and a board of directors, including:

  • practical differences; 
  • legal differences; and
  • risk differences.

Who Is a Director?

The Corporations Act defines directors as people who are validly appointed as directors. A company director may also be those who are not validly appointed as a director, but who:

  • act in the position of a director (a de facto director); or
  • have power and influence over the company, and the board is accustomed to act under their instructions (a shadow director).  

Practical Differences

The board of directors is the governing body of a company, and shareholders appoint each director. Directors are generally responsible for the day-to-day operation of the company. Likewise, they have a duty to act in the company’s best interests. Directors responsibilities include the following well-established roles:

  • confirming the company’s business plan;
  • setting the strategic goals and direction of the company; 
  • reviewing and scrutinising the company’s accounts; and 
  • appointing senior staff members to run the company. Such senior staff members include the CEO and other company executives.

Conversely, the company founder or its board of directors generally engage an advisory board. An advisory board often provides specific industry, business or general strategic advice. However, advisory boards cannot participate in the board’s decision-making, dictate how management operates the company, or appoint staff.

Legal Differences

Directors have statutory and fiduciary duties to a company. These duties come from:

Directors’ duties include a duty to:

  • act in good faith; in the best interests of the company and for a proper purpose; and
  • act with reasonable care and diligence.

Additionally, directors have a duty not to:

  • disclose or make improper use of confidential information;
  • make improper use of the position of director; and
  • trade while insolvent.

Failure to satisfy the requirements of, or breaching, these duties can have significant consequences. For example, offending directors can be removed from the board and banned from acting as a director. Offending directors also risk facing legal action and significant fines and penalties under the Corporations Act. Therefore, all company directors must be aware of the duties associated with the position and their obligations to the company.

There are no explicit legal duties for advisors on an advisory board. As such, advisors do not need to comply with or satisfy directors duties. However, advisors on an advisory board are subject to general legal duties, such as:

  • not misusing or disclosing confidential information; or
  • using reasonable skill and care in providing services.

A company may also outline additional contractual duties in an advisory board agreement. In that case, advisors must comply with these duties.

Risk Differences

It is essential to have a clear understanding of the proper role and definition of a company director. This ensures there is a clear distinction between your directors and the roles of your advisory board members. You want to avoid conflating the roles of your directors and advisors. Likewise, you want to avoid the risk of your advisory board members being exposed to director’s duties, risks and liabilities.

Directors face personal liability if they breach their duties, particularly when the company trades while insolvent. As a result, it is common for businesses to take out directors and officers insurance to help manage the risks associated with a director’s role.

Conversely, advisors are exposed to, or assume, less risk than directors. This is because there are fewer specific duties at law. In particular, advisors have no obligations in respect of insolvent trading. 

You will likely find that people are more comfortable as advisers rather than directors. This can be due to the lower risk profile, particularly in circumstances of a young business trading with little cash, which have less of a buffer against insolvency compared to larger more established businesses.

Key Takeaways

If your company is looking to appoint advisors, your advisory board agreement should be clear on the advisors’ duties. Likewise, understand that advisory board members do not have power and influence over the company. They cannot give directions or instructions to the directors, and the company is not required to act on their advice. This clarifies the role and helps protect your advisory board members from being seen as directors and having director’s liability.

An advisory board can be a considerable asset for your business at all stages of growth. Once you understand the role and requirements, you can confidently recruit an advisory board, help manage risks, and ensure that your business benefits from their knowledge. For more information in setting up an advisory board, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What are the differences between the role of a director versus an advisory board?

Directors are generally responsible for the day-to-day operation of the company. Likewise, they have a duty to act in the company’s best interests. Conversely, an advisory board often provides specific industry, business or general strategic advice. However, they cannot participate in the board’s decision-making, dictate how management operates the company, or appoint staff.

Do I need to act on the advice of my advisory board?

Advisory board members do not have power and influence over the company. They cannot give directions or instructions to directors. Likewise, a company does not need to act on their advice.

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