Board of Advisors or a Board of Directors

Posted in Board Development by Jim
07 May

Should you have a Board of Advisors instead of a Board of Directors

In private companies, the biggest question facing ownership that wants a board is should it be a Board of Directors or a Board of Advisors? If there is a single owner of the business the answer is most likely a Board of Advisors. The Board is only making recommendations that ultimately management does not have to follow since there is a single majority owner.

The exception is when the owner does not run the company, but has a separate CEO and management team. Then the governance that a Board of Directors calls for is needed.

A Board of Directors basic charter is to:

  1. Hire and fire the CEO
  2. Approve company strategy
  3. Act as a fiduciary for the company shareholders.

There are many other additional activities like audit and compensation, etc. that are done by board member but they all fall under those three areas.

Private and family owned business that have multiple owners or shareholders often move from a Board of Advisors to a Board of Directors as a way to consolidate decision making and governance. It is important to charter this new structure and create bylaws that make clear the directors understand they now have fiduciary responsibilities and need to have Director & Officer Insurance for the risk they are taking on with the shareholders.

Either way a board can be a significant strategic advantage for a company long term.