This is the 4th article in our 5 part series about advisory boards. The 1st explains what an advisory board is, 2nd explains why you may have an advisory board, the 3rd discusses how to select the board, the 4th explains the difference from a Board of Directors, and the 5th explains the legal documents required.
The knowledge of experienced business people who want to see you succeed is an incredible asset to your business. Traditionally such wisdom came from a board of directors. New businesses are increasingly seeking guidance by forming an advisory board.
An advisory board is an informal panel of independent people who give non-binding strategic advice to the owners and founders of a business.
A key risk issue for advisory board members is that they should not inadvertently assume the role of director. Directors have specific duties, and therefore director’s liability under the Corporations Act and general law. An advisory board role does not have these requirements.
This article discusses the key differences between an advisory board and a board of directors, including:
- Practical differences
- Legal differences
- Risk differences
The board of directors is the governing body of a company. Directors are elected by the shareholders to act in the best interests of the company.
To fulfil their duties, directors have well-established roles to sign-off on the business plan, set the strategic goals, scrutinise the company’s accounts, and appoint senior people, including the CEO, to run the company.
An advisory board can provide broad strategic advice, but cannot dictate how management run the company, and cannot appoint staff.
Directors have statutory and fiduciary duties to a company, from:
- the general law;
- the Corporations Act; and
- the Shareholders’ Agreement.
Directors’ duties include:
- Duty to act in good faith and exercise business judgment;
- Duty of care and diligence;
- Duty not to disclose or make improper use confidential information;
- Duty not to make improper use of the position of director; and
- Duty not to trade while insolvent.
Failure to meet these duties can result in the director being removed from the board, being at risk of legal action, and facing significant penalties under the Corporations Act 2001 (Cth). You should make sure that the directors in your company are aware of their duties and obligations to your company.
There are no specific general law duties for advisors on an advisory board. Advisors on an advisory board do not have the same duties. Advisors on an advisory board are only subject to general law duties, including not using confidential information which ought not be divulged. You can impose contractual obligations on advisers, in an advisory board agreement.
It is important to understand the definition of director, so that it is clear that advisory board members are not directors. This is so that they are not exposed to director’s duties, risks and liabilities.
Directors face personal liability if they breach their duties, and in situations where the company trades while insolvent. It is common for businesses to take out directors & officers insurance to help manage director’s risk.
Advisors face less risk than directors, because there are fewer specific duties at law. For example there is no positive duty to be comfortable that the company is not trading while insolvent.
People may be more comfortable as advisers rather than directors, particularly while the business is new, and trading with little cash, with less of a buffer against insolvency than a larger business.
Who is a director?
The Corporations Act defines directors as:
- people whom are appointed as directors; and
- non-elected people with power and influence over the company, such as a shadow director. A shadow director is someone in accordance with whose directions or instructions the directors of the company are accustomed to act.
In conclusion, if you appoint advisors, your advisory board agreement should be clear on the advisors’ duties, and be clear that advisory board members do not have power and influence over the company. The advisory board cannot give directions or instructions to the directors of the company. The company is not required to act in accordance with directions or instructions of the advisory board. 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 assistance in setting up an advisory board, contact LegalVision on 1300 544 755.