Part 1: Advisory board vs board of directors - defining the difference

By Matthew Pringle - October 12, 2018

Part 1 in a six part series - 'The ins and outs of advisory boards' - on establishing advisory boards for small and medium enterprises.

To gain a competitive edge, small and medium sized businesses are increasingly turning to advisory boards. Advisory boards add expertise and networks to an organisation, and rigorously and independently challenge thinking within a business. They can expand organisational capacity, reach, and impact in ways that might not otherwise be appropriate or feasible for business owners or management.

Advisory boards are generally created to focus on the big picture, by providing objective advice and contributing to strategic planning. Good advisers can give fresh insights and thinking on emerging or unfamiliar issues, respond to ideas from business owners and management, play devil’s advocate, and supply high quality objective advice to support the main decision-makers.

How is an advisory board different to a board of directors?

An advisory board does as its name suggests: it advises. Unlike a legal board of directors, it has no decision-making power. There are a number of other differences between these two boards.

Advisory board

Board of directors

Big picture – strategy and trends

Concerned with detail

Flexible structure and management

Formal structure and management

Non-binding strategic advice

Decision making power

No authority to act on behalf of the company

Authority to act on behalf of the company

Objective advice on strategic aims

Vested interest

Role is not defined and members owe no fiduciary duties to the company or its shareholders

Fiduciary duties, e.g. a responsibility to act in good faith in the best interests of the company and for a proper purpose

Technically have no legal liability or legal responsibility

Bound by the rules and regulations of the Corporations Act

Responsible for company performance and conformance with legal and regulatory requirements - directors can be held legally liable for not fulfilling these duties

Benefits of an advisory board

Business ownership and CEO positions can be lonely places, with few people to confide in or use as a sounding board to test out ideas and concepts. An advisory board can enable owners or managers to access an independent view or ‘safe’ place to discuss issues of major significance.

Other benefits of an advisory board include:

  • Drawing on the skills and knowledge of advisors who have practical experience in growing a business
  • Gaining knowledge and experience from past competitors, key suppliers or customers.
  • Enhancing the company’s reputation and credibility in the marketplace by aligning with key individuals
  • Increasing consumer and investor confidence in managements competency
  • Attracting superior employees by demonstrating a commitment to growth and an openness to external ideas
  • Creating a potential source of members for the ‘main’ board as the company grows
  • Testing the quality of ‘outsider’ contributions to the business, family or management

Coming soon - Part 2: Do you need an advisory board?

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