First let’s start with – what is an advisory board?  They are a group of professionals in particular industries who provide advice to your board of directors. You can choose your members from a wide variety of industries to suit the needs of your business. Advisory boards have become particularly popular for start-ups and small businesses that have limited capital. Advisory boards are also quite useful for large businesses that want to gain a third opinion on the direction of their business!

An advisory board is a great way to gain a wealth of experience with minimal costs. Members will work closely with your company to help it reach its potential. However they are not a substitute for your board of directors. An advisory board should only be relied upon for broad strategic advice. Directors of your company can take into account the insights and guidance of the advisory board but should not base decisions simply on the opinions of the advisory board members.

Directors and advisory board members hold very different roles. Directors of a company are responsible for making decisions for the everyday running of a company. They usually are employed by the business or hold shares in the business. Additionally directors hold both statutory and fiduciary duties to the company. They include the duty to exercise due care and diligence in relation to all decisions. Failure to meet these duties can result in severe penalties under the Corporations Act 2001 (Cth). You should make sure that the directors in your company are aware of all their duties and obligations to your company.

Members of an advisory board have no decision-making power whatsoever. They are there to provide guidance and advice only. Directors should take care to make sure they are not unduly influenced by members of the advisory board. Where this occurs, members may become de facto or shadow directors for the purpose of the Corporations Act 2001 (Cth). In cases such as this, the members will take on the same statutory and fiduciary duties of directors of the board and may breach that duty where they do not exercise due diligence. Companies should take care when outlining the roles and responsibilities of an advisory board.

Are you considering setting up an advisory board? There are a number of legal issues you should be considering! Call LegalVision to discuss all of your options today!

Priscilla Ng

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