Best Choice: A Board of Directors or an Advisory Board?

To survive and thrive in a competitive marketplace, companies need to secure help and guidance from a wide range of sources. To do so, many companies create advisory boards, or more formally, a board of directors to help guide them and hopefully facilitate growth. If your company plans to go public, it will be required to put a board of directors in place. However, prior to that time, you may be faced with the decision as to whether to create a board of directors or an advisory board.

To determine which path makes most sense for your organization, here are some of the primary differences between a board of directors and an advisory board:

Regardless of which path your company chooses to pursue, there are best practices that can apply to both options. Consider the following:

1. Choose wisely. To avoid “group think”, where people tend to think along similar paths, don’t engage individuals that possess experience and views that are similar to the CEO and executive management. Look outside your immediate network. Diversity of experience and thought can be translated into a competitive advantage. A prospective board member should have:

• A track record of success.
• High ethical standards that they are not willing to compromise.
• Industry knowledge or a willingness to gain the appropriate knowledge.
• Sufficient time to dedicate to the role.

2. Identify today’s challenges. Before forming a board of any type, take stock of where the company is today, as well as the future aspirations and challenges it will face. For example, if your company plans to enter a foreign market within the next year, it makes sense to include an individual with this type of experience on your board.

3. Don’t over or under build. It is possible to have too many members in either type of board, and it is also possible to have a board that is too small to bring about change. Many corporate governance experts recommend that in order to be effective and accomplish all of a traditional board’s legally mandated responsibilities, seven to nine board members are needed.
An advisory board can certainly be smaller than a traditional board and still be effective since it is less formal in structure and nature. In either event, first identify the company’s challenges and the skills needed to address them, and then choose the optimal number of members. A small, yet ineffective board is just as problematic as a large, overstaffed board.

4. Focus at the committee level. In the case of a board of directors, there are typically three to four crucial committees — audit, compensation, nomination, and executive. Each committee should have a clear mandate and meet regularly to discuss the issues it is charged with addressing.

As you can see, there are significant differences between a board of directors and an advisory board. By examining them, you can decide what type of board is best for your business. Keep in mind that an advisory board offers many of the benefits associated with a board of directors. Depending on the size and maturity of your company, it may be the most viable option to pursue.