Advisory Boards Can Benefit Small Firms
Small or medium-sized companies in New Zealand should consider creating an advisory board.
Advisory boards provide non- binding strategic advice to organisations, unlike the board of directors appointed under the Companies Act. They are informal in nature and therefore have greater flexibility in how they are set up and managed. They can be created to deal with a specific matter or can be ongoing.
The main board is responsible for company performance and conformance with legal and regulatory requirements. Directors can be held legally liable for not fulfilling these duties. Advisory boards, on the other hand, are informal. Their role is not defined in the Companies Act and therefore members owe no fiduciary duties to the company or shareholders.
Roles will vary between companies but generally relate to providing objective advice on strategic aims. They have no authority to act on behalf of the company.
Roles and responsibilities
Each company will determine the roles and responsibilities of its advisory board to suit their own circumstances and needs. These should be formalised in a charter, which is in turn ratified by the main board.
Because there is no legal definition for advisory boards, the company can structure this board in the most appropriate fashion.
Companies must be clear on the purpose of the advisory board and what it hopes the board will achieve. This will help determine the skills, knowledge and experience needed and assist in the selection of members of the advisory board. A clearly defined purpose will contribute to the success of the advisory board.
Advisory boards are generally created to focus on the big picture – strategic issues and industry and market trends.
Their principal roles are to provide objective advice and contribute to strategic planning.
Good advisers can give fresh insights and thinking on emerging or unfamiliar issues, respond to ideas from management, play devil’s advocate and supply high- quality objective advice to support the main board’s decision-making.
Many advisers are selected because of their contacts and their ability to facilitate introductions to potential suppliers, customers, and so forth.
The directors of a company’s ‘main board’ owe duties of good faith and care to the company and can be liable if they fail to meet this obligation.
Technically, advisory board members do not owe these duties. However, caution should still be exercised.
Without clear lines of demarcation between the roles of the advisory and main board, there may be circumstances where a court might think that the main board relies on the advice of the advisory board without giving it due analysis and consideration, particularly if there is a negative outcome for the owners of the company.
This may lead to accusations that the advisory board members are acting as shadow or de facto directors. A de facto director is a person who is not actually appointed as a director but acts as if he or she were (often incorrectly believing that he or she has been properly appointed as a director).
A shadow director is also not appointed as a director but is a person on whose instructions or wishes a company’s board members are accustomed to act. These are understandably complex areas which advisory boards wish to avoid.
Creating a formal charter outlining duties and responsibilities of the advisory board will help to properly distinguish its role from that of the ‘main board’. This minimises the chances of liability for advisory board members.
The charter should include statements about the advisory board members not being appointed directors and having no authority to act on behalf of the company or to make decisions. The charter should also clearly state that the advice given is non- binding.
Directors on the main board are still expected to discuss, debate and decide on a course of action themselves, having considered the advice of the advisory board.
This charter should be ratified by the main board.
Advisory board members should attend main board meetings only when presenting their advice. They should not be present for the board’s decision making.
To protect the company, the advisory board members should be acting in the best interests of the company and not for personal gain. Their agreement with the company should include a condition requiring disclosure of potential conflicts of interest. They will also be privy to sensitive company information, so signing a confidentiality agreement should be considered too.
These matters can be captured in a letter of appointment.
The ultimate aim of having an advisory board is value creation.
If the advisory board is not creating value, then reconsider who sits on it or whether having one is the best means of achieving the purpose.
An advisory board adds value when there is an appropriate mix of people and there is open, frank and free-flowing discussion.
Henri Eliot is chief executive of Board Dynamics, a consultancy which provides strategic advice to directors and boards.