Several times in recent weeks, I have been asked about advisory boards. Individually, none of the requests are especially remarkable. But when several questions are posed in close succession (such as those listed below), by people in several different countries including Australia, New Zealand, the United States and Ireland, it may be timely (again) to review the phenomenon.
- What is an advisory board?
- I'm running a company and it's going gang-busters; but a consultant said I should set up a[n advisory] board. Why, and should I take this recommendation seriously?
- What does an advisory board do anyway?
- What is the relationship between an advisory board and a real board?
- Could you (me), given your 'governance expertise', chair my advisory board?
The spate of enquiries set me thinking. Advisory boards have, at various times, been both topical and the source of much confusion and debate. But why the heightened level of interest at this time? Has the recently-published HBR article on shadow boards been a catalyst, or is something else going on? It's almost impossible to tell, except to observe that the person posing the question—usually an entrepreneur or a founding group—wants to know more. Either they've read or heard about advisory boards, or been advised by someone that they 'need' one (their accountant, a firm specialising in establishing advisory boards, some other consultant). The recommendation is typically justified on the basis that advisory boards are a stepping stone, "before taking on a full board". The implication is that the entrepreneur or founding group does not have to give up control. And therein lies a common misunderstanding: that an advisory board provides a bridge to, or is a substitute for, a board of directors. It is not (*).
Before going any further, let's lay down some definitions:
- A director is a person who acts as a director of a company and fulfils various (specified) duties, as defined in the [company] law. This definition is universal. Collectively, a group of directors is called a board of directors. Although the name (director) is reserved in the statute, the name itself is not as important as the function the person is performing. Regardless of the term used, if a person is doing things that a director would normally be expected to do, they can be deemed to be a director. If the entity is a company then it must have at least one director (some jurisdictions require at least two), which means it has a board already. But that is not to say that the normative practices of corporate governance (the provision of steerage and guidance, monitoring and supervising management, etc.) are apparent, or even necessary (most statutes do not mention the word 'governance').
- An advisor is someone who is retained (typically from outside the company) to provide advice that the recipient may, at their sole discretion, accept or reject. In a company context, the person or group seeking the advice could be a manager, a company founder/entrepreneur, a director or the board of directors. Examples include a lawyer; a coach; a tax, IT or AI specialist; or an industry expert.
- An advisory board is a term of convenience that has entered the lexicon in the past decade or so, usually in the context of smaller size companies. It is typically used to describe a group of advisors who meet periodically—even regularly—to consider questions and provide advice.
Turning now to the question posed in the title of this muse: Are advisory boards a good thing? The answer depends on the purpose and function of the group of advisors (let's not use the term 'board' just now):
- If the group is formed to discuss a situation and provide specialist advice, that is little different from the retention of a lawyer or any other subject matter expert. This can be a good thing—depending on the quality of the advice provided, of course!
- If the group meets regularly, and especially if meetings are conducted (or tasks performed) in a manner normally associated with a board of directors, then the group may be exposing itself to additional risks. Indicators include an advisory board charter, the appointment of a board chair, a regular meeting schedule with an agenda and minutes (which are subsequently checked and approved at a later meeting) and the consideration of reports produced by a manager (or management). If such indicators are present, the group may be, in the eyes of the law, acting as if it is a board of directors (and the duties and responsibilities that entails). Thus the terms 'deemed directors' and 'shadow board' prevalent in various jurisdictions.
It's important to note that the 'deemed director' / 'shadow board' risk is borne by the advisor(s), not the manager, entrepreneur or company. But it is easily mitigated. Here are some suggestions:
- When a manager (entrepreneur, director, board) seeks advice, advisors should request a terms of reference or an engagement letter that clearly defines the type of advice sought, and by whom; the advisory period; the expected deliverables; and the fee to be paid. After the advice is provided (or the advisory period lapses), the advisor(s) should be released.
- The term 'advisory board' should not be used, ever. To do so implies regularity and conduct normally characteristic of a board of directors.
- If external advice is required from several advisors, call the group for what it is, a group of advisors (or some other informal descriptor).
- Meetings should be called and run by the manager (entrepreneur, director, board).
- The person or group seeking the advice may elect to take notes for his/her/their own record, but these should not be described or circulated as 'minutes'.
While this is not an exhaustive list of mitigations, they are globally applicable.
The bottom lines? (Yes, there are two)
- Managers (entrepreneurs, directors, boards) can and should continue to seek specialist advice from external parties from time to time.
- Advisors should avoid being enthralled by the prospect of joining an advisory board—the risks are not worth it. Win the business, provide the advice, move on.
(*) If the entity is a company, a board needs to be in place from day one, regardless of whether advice is sought from third parties or not. The role of the board (i.e., corporate governance) typically includes setting corporate purpose and strategy; policymaking; advising, monitoring and supervising management; holding management to account for performance and compliance with relevant statutes; and providing an account (from both a performance and a compliance perspective) to shareholders and legitimate stakeholders. The formality with which these functions are enacted is, appropriately, contextual. Click here for more information.
