A board of directors and an advisory board are two distinct entities with distinct responsibilities, and often there is confusion about the differences. This is due to the fact that a few companies use both terms interchangeably and the term “board” has numerous meanings in the business world. This can be further exacerbated by not defining in writing the function of the advisory committee, either through a bylaw, or resolution of the board.
A clear, documented distinction between your advisory and board of directors can help you to avoid confusion, especially if you work with effective board member individuals who might not be legally able to serve as directors such as teachers who set up micro-schools or established entrepreneurs with small personal shares. This is crucial because an official board of directors will have responsibilities, risks and liabilities that advisory boards do not have.
An advisory board exists to serve as a sounding-board for the CEO and management team and provide them with advice and connections that they might not have access to. Typically advisory boards are not shareholders or investors in the company and they don’t have any voting rights.
A board of advisors, despite their expertise in specific fields do not have the ability or authority to direct an organisation. This is because the management team and CEO are the ones who make decisions and not the advisory board. Only if an advisory board is granted official board committee status with voting rights and insurance for liability under Deeds Indemnity and Directors and Officers Insurance, will they have the power to direct the company.