We are often asked by many of our potential clients, "Do I need to set up an advisory board or a board of directors?" The answer to this primarily depends on your corporate structure and how much flexibility you would like in working with your board. In general, if you have outside investors in your company that are not involved in the daily operations of the business then you may want to consider the possibility of setting up a board of directors. It often depends on who the investors are and how many you have but that is a general rule of thumb.

The main difference with these two boards comes down to fiduciary responsibilities and the liability associated with those responsibilities. A Board of Directors or Board of Governance is primarily tasked with protecting the interests of the shareholders of the organization. They are responsible for making sure that a company is not being financially or otherwise mismanaged and trying to protect and enhance shareholder value. Advisory boards do not typically deal with financial issues and thus those serving as advisors do not have a fiduciary responsibility nor is there much liability to be worried about.

Some other important differences to consider:

Cost: The cost of Directors and Officers insurance that protects the officers that are serving can get expensive. In addition you will still need to pay attorneys and CPA's to set up the board and you still have to pay your board members. Advisory boards do not require D&O insurance as there is no fiduciary responsibility or liability. In addition, the costs of Attorneys and CPA's can be greatly reduced as you can get a fairly simple advisor agreement in place although given the sensitive nature of what is being discussed we would recommend making sure that your agreement covers all of the bases.

Strategic vs Fiduciary: Although a Board of Directors should be both, it is often difficult to do that given the nature of the board discussions and the types of members that maybe on a board. Typically an advisory board is going to be comprised of more "industry" experts that are there to impart their knowledge to the company for strategic reasons and not the financial aspects or what is going to ensure the biggest return for the shareholders.

Types of members: ABA advisory boards are comprised of active "C" level executives with major organizations. Given there is no liability, we further eliminate any conflicts of interest and the structure of our agreements allows us to get around any issues their General Counsels may have with one of our clients. We have found that it would be difficult to get many of these types of members to be officers or directors of a company given their current situation. For various reasons already mentioned there are limits on the types of outside board activity these people can participate in.

Time: as we will discuss in future blogs this is a critical component for both types of boards to be successful. In this case we are discussing the time commitment from a member of officers perspective. An ABA advisor can typically expect between 15 and 25 hours per year (we have a very efficient process) where in a typical board situation you might be looking at a minimum of 60 hours per year and goes up from there and if you are on a committee you could be upwards of 100 hours per year.

There are many other differences as well, but we have only highlighted a few of the more obvious ones. As a general rule ABA does not see a huge amount of value in a Board of Directors for small privately held organizations. Unless you have outside investors most of our clients get far more flexibility and a lot less cost in utilizing an advisory board. You can also attract a higher caliber board member as we are finding that many senior executives in large organizations are starting to have issues with the liabilities, conflicts and time that go with a small company board of directors. In other words, when you have a small privately held organization where the owners are the managers, do they really need to protect each other from themselves? We have found with most of our clients that what is really needed in most cases is advice from people to help you understand what you aren't sure of in your business model or what you may not even know.

Bob Arciniaga
Managing Partner
Advisory Board Architects