Board of Advisors 101: What, Why, How?
By Joanne Hue, Last updated: 2023-01-11 (originally published on 2022-02-24)
What is a ‘Board of Advisors’?
A board of advisors is a group of business professionals which renders advice on management of a company by a business owner. The board can be structured in a way the owner of the business finds it necessary and useful for the company.
The reason being that the board is of informal nature. The compensation received by the advisors is typically stock-based such as options and benefits from an increased valuation of the business.
Generally, a Board of Advisors consists of a legal advisor, a financial advisor, a Human Resource manager, a marketing advisor and accountant to handle the accounts of the business and to present views on current financial trends in the business world.
What is the importance of advisors for a startup or business?
The more a business grows, the more attention it requires and even greater issues arise. They have to be handled precisely and accurately for continued success and growth. Therefore, a Board of Advisors becomes highly important for a number of reasons.
- Business Development: when a company expands, the pressure to grow increases too. A bigger team is then required to handle and manage growth. A Board of Advisors help the company by receiving feedback from the consumers or end-users of the products and services of the company. They also help to introduce the company to potential users and clients.
For example, a company that has a manufacturing business of disposable utensils can hire a board member who used to be a Vice-President of an international fast-food chain. Another possible advantage is that he may be able to close a deal by introducing the company to his former CEOs.
- A good backup system: A Board of Advisors consisting of business professionals who are popular in their particular field or industry will be useful for a company and its growth. It will help attract more investors and also creates a feeling of confidence because individuals place their trust in the company.
How is a Board of Advisors put together?
It is easier to talk about bringing together a Board of Advisors but the actual task of getting everyone on board is not quite the same. However, there are a few things that can help company owners put together a Board of Advisors to help with the growth of the company.
- Identify the members of the board: the members of the Board of Advisors should not simply be chosen because they are well-acquainted with the owners of the company. They have to be chosen based on certain criteria like relevant experience and knowledge of the industry where the business operates.
- A Board with no more than five advisors: there should be either three or five members. When there are more than five members in the board, it can get complicated and could reduce the overall productivity of the board.
- The Board of Advisors should not consist of members who are immediate family members or relatives. The reason being that their emotional connection may interfere with the operation of the business. Generally, the board members should be working a full-time separate job but at the same time be interested in the growth of the business.
What is the difference between a board of advisors and a board of directors?
Although both the board of directors and the board of advisors are involved in running a company, there are significant differences between them, such as:
- As mentioned above, the Board of Advisors is formed informally whereas the Board of Directors consist of members who are elected and are also accountable to the company. They are regulated by law as they represent the organization and its stockholders. They are also involved in creating policies and handling problems associated with the operation of the business.
- The Board of Directors are regulated by the law. Their duties and responsibilities are wider than those of a Board of Advisors. As discussed, they are accountable to stockholders, they have to be careful with the advice they render.
- The selection of the members of the Board of Advisors is very informal as the owner selects its members when it seems necessary. They don’t have any voting rights whereas the Board of Directors have a direct involvement in the decision-making of the business.
- It is not necessary for an owner to follow the advice of the Board of Advisors whereas the Board of Directors is more powerful. They have the power to bring changes in the company and suggest specific directions for the company.
- The members of a Board of Advisors are experts in their respective fields. On the other hand, the Board of Directors may require help from industry experts or specialists to understand and handle situations.
- The compensation received by the Board of Advisors is very minimal while the Board of Directors get paid a hefty amount. The Board of Advisors are only entitled to free meals during meetings. The allowances received by the Board of Directors include travel allowances and other fees such as for attending the board meetings.