Companies need more than just their leaders to be successful. They also need a reliable board to guide them through the most crucial decisions. After all, the IESE Business School explains that corporate boards help align organizational culture, develop internal governance, and foster diversity of thought. Additionally, entrepreneur Lisa Skeet Tatum explains on the podcast HSBC Talks Business that a board of directors and an advisory board are critical to reaching business goals. This is because a board acts as a professional support system that can offer expertise and industry insights. Over time, a corporate board’s strategic involvement can help you grow and scale your business and troubleshoot the stumbling blocks that may come your way.

That said, putting together a board is not the most straightforward exercise. Because no one builds a company alone, looking for individuals who can leverage and complement your skills is essential. Aside from this, it’s also important to determine what kind of board your company even needs. As such, this article will further explain the difference between a board of directors and an advisory board to help you decide on what your company needs.

What is a board of directors?

A board of directors is a group of people who make decisions for your organization. They are usually appointed or voted in by the shareholders of a company. Because of this, boards of directors can have relatively diverse members. While some may be industry insiders, others may be voted in by merit, popularity, or financial contribution. The board of directors’ primary role is to help the CEO make intelligent decisions about what to do with the company’s resources. The board of directors makes independent decisions for the company’s sake. This means they’ll keep the company’s best interests as their main priority. Ultimately, this function is expected to result in objective and well-rounded business initiatives.

What is an advisory board?

An advisory board is a group of people who give educated recommendations to a company on its business, strategy, and tactics. Given their diverse expertise, they can help your company gain insight into customers, industry trends, and competition. Furthermore, they can provide informed guidance and input on business operations. Members of an advisory board may be industry experts, mentors, or established professionals in related fields. For example, Google uses several advisory boards led by industry leaders in specific sectors. For instance, just a few years ago, Google announced a special advisory board that would oversee the ethical use of AI. As explained in our post “Moving from Strength as Doer to Strength as Advisor,” becoming an advisor takes skill and practice in imparting wisdom to those starting out in the business sphere. Thus, advisory boards are typically very carefully put together.

What is their key difference?

The main difference between the two lies in their fiduciary responsibility. A board of directors has a fiduciary duty to act in the interest of shareholders and ensure that the company is run efficiently and profitably. They can vote to make changes to the company and be financially liable if their advice causes damage to the company’s operations. On the other hand, advisory boards do not have such a burden. They do not have voting powers, and their advice is merely a suggestion that the company can choose to follow at its discretion.

What does your company need?

Although you can certainly implement the two boards in your organizational structure, not all companies choose to do so. Whether your company needs a board of directors or an advisory board primarily depends on the size of your business and ownership structure. Shareholders, particularly those not directly working in the business, may request that the company establish a board of directors to protect their investment. They will often settle competing perspectives through a formal voting process. All publicly traded companies are required to have a board of directors.

On the other hand, smaller companies with a small number of shareholders who most often also work in the business may not need a board of directors. However, they would benefit from an advisory board’s opinion. Because advisers can act as sounding boards for ideas or provide unique perspectives to troubleshoot operational issues, they are excellent mainstays for businesses starting or looking for expansion strategies.

Both types of boards can be helpful in different ways. As with all things business, knowing each type’s role is paramount before deciding which is best suited for your company.
Please get in touch with us if you are interested in learning more about this or other topics. We are only too glad to help.

Article written by Rose Grace James

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Professional Business Coaches, Inc.

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