Entrepreneurs are increasingly

aware of the benefits of

Advisory Boards

Most entrepreneur-owned companies would benefit from the expertise and strategic insight of a skillfully-assembled advisory board to augment a typically closely-held board of directors. Entrepreneurs are increasingly aware of the benefits of Advisory Boards. As advisory boards become increasingly common, they need to be clearly distinguished from a “board of directors.”

Five key differences between an advisory board and a board of directors.

1. The key difference is the nature of fiduciaryresponsibilities and the liability associated withthose responsibilities. A Board of Directors isprimarily focused with protecting the interests ofthe shareholders of the organization. They areresponsible for making sure that a company isnot being financially or otherwise mismanaged.Advisory boards, by contrast, do not typically deal

Individuals serving as advisors do not have a fiduciary responsibility to shareholders, and thus no liability.

2. An advisory board is focused more on strategic issuesrather than operational issues. Typically an advisoryboard will be comprised of big picture experts that arethere to impart their knowledge to the company forstrategic reasons. By contrast, a board of directors willfocus more on the financial aspects of a company andwill review financial results on a quarterly basis.

3. An advisory board and a board of directors draw upondifferent types of members. Advisory boards canattract a wider range of individuals because there is nofear of liability, especially those who have built up theirnet worth through successful endeavours. Advisors,

ADVISORY & CORPORATE BOARDS:AN ENTREPRENEUR PERSPECTIVE

with financial issues. Advisory board members report directly to the president / owner of the company; they are not accountable to shareholders or even interact with company executives. Continued on next page

for example, may include active entrepreneurs who are operating major organizations. Often it would be difficult to get many of these types of members to be officers or directors of a company, given other business interests.

4. There is a significant difference in costs betweenoperating an advisory board and a board of directors.The cost of Directors and Officers' (D & O) Insurance canget expensive. In addition, companies will still need topay lawyers and accountants to set up the board andcompanies still have to pay board members. Advisoryboards do not require D & O Insurance as there is nofiduciary responsibility or liability. In addition, the costsof lawyers and accountants are far less costly to draft arelatively straight-forward advisor agreement.

5. There is the aspect of time commitment. Timecommitment is a critical component for both an advisoryboard and a board of directors to be successful.An advisory board member can typically expect between20 and 30 hours per year where in a typical boardsituation, an individual would be expected to contributea minimum of 60 hours per year or more. Withcommittee involvement, the time commitment could beupwards of 100 hours per year.

In the context of these five differences, companies can decide upon the most appropriate course of action. More specifically, how should entrepreneurial companies approach the possibility of establishing an advisory board? For many entrepreneurial companies, an advisory board is a more suitable option than a board of directors.

While a board of directors is an important and legally-mandated entity, most entrepreneurs prefer to keep the board of directors closely held and limited to major shareholders. Why? The entrepreneurial environment is very different from a large-scale corporate environment where potential liability may be less of a risk and there is not the same need to be a shareholder in a large corporation.

Advisory boards can provide value directly to the entrepreneur through high level and targeted expertise on strategic issues facing the company. Highly-skilled individuals may be more attracted to an advisory board rather than a board of directors’ position because there is less of a time commitment. In addition, a key point is that advisory board members do not need to be concerned about liability.

An advisory board also fits the dynamics of an entrepreneurial environment more appropriately. Most entrepreneurs want to be equipped in fast-moving companies. They want specific advice from individuals based on experience. They want to be challenged by seasoned mentors. They also want flexibility. When it comes to directors, entrepreneurs want people at the table with a vested interest who have earned the right to sit at the table.

A board of directors and an advisory board, while distinctly different, can work in a complimentary fashion within an organizational structure. Entrepreneurial companies with a more fluid structure are typically more fertile ground for advisory boards than more established companies. Advisory boards will continue to grow in popularity as a means for entrepreneurs to bolster their company’s prospects for success.

BOARDS CONTINUED