What is an Advisory Board?
Advisory boards and boards of directors can play a significant role in creating value for firms in New Zealand. The two things they have in common are the word ‘board' and the interests of the company at heart. Apart from these, they are fundamentally different. Aspiring directors who have had no experience of either need to bear in mind the following:
The board of directors
- has a fiduciary responsibility to act in the best interests of the company
- is appointed by shareholders
- must manage or direct the business and affairs of a company (the ‘board' may be a sole director registered under the Companies Act 1993)
- has all the powers necessary for managing, directing or supervising the company
- is liable for its actions
- may direct management.
The advisory board
- has a primary role of advising
- has no power of veto and cannot direct or instruct management
- is not a management committee since its members are typically external advisors who are there to bring fresh and objective perspectives
- is generally appointed by the managing director/owner or CEO to whom it is accountable.
Members of advisory boards must be careful not to put themselves in a position where under the Companies Act 1993 they may be deemed as directors and consequently be liable for any liabilities and actions made against a company, particularly third parties. So, to preserve the independence of an advisory board, formal directors and managers should not be members. Nor should advisory board members become shareholders.
Why an advisory board and not a board of directors?
Advisory boards are useful where business owners are unwilling to relinquish control. As an advisory board member you have to be prepared to have your advice ignored. They are a mechanism for a managing director to gain confidence in working with a ‘board' and access a range of strategic and operational advice on a long-term basis. They can be a preliminary to a formal board of directors but are not a prerequisite. The usefulness of an advisory board depends on a company's particular circumstances. The Institute of Directors has no general recommendation on their desirability.
Aspiring advisory board members should undertake due diligence on expectations, operating instructions (terms of reference) remuneration and leadership before taking on the role.
The above article was written by Dr William Whittaker, Research and Policy Manager, of the New Zealand Institute of Directors. It is taken in its entirety and as it appeared in the July 2009 issue of "boardroom" the monthly magazine of the Institute of Directors in New Zealand. Ysker acknowledges "boardroom" as the source of the article.