ADVISORY BOARD VS. BOARD OF DIRECTORS: A COMPARISON

What is an Advisory Board?

An Advisory Board is a body made up of two or more industry experts who provide valuable advice on subject matters to a company or the founder/entrepreneur. In their advisory board capacity, members offer hands-on tactical advice and active participation, contrasting with the strategic and higher-level focus of a board of directors. They fill knowledge gaps in the company. The Advisory Board fulfills an essential function, which is to be an impartial third party that is aware of all developments and guides the decisions in the company.

There is no regulatory requirement to establish an Advisory Board. Many Advisory Boards serve in a volunteer capacity, at least initially and in the early stages of a company. As the company progresses, Advisors are compensated with equity in the company and other benefits, and many advance to serve on the Board of Directors.

Forming an Advisory Board is an excellent way for a company to tap into external expertise, obtain an independent point of view and determine if there is a fit between the company and the individual, be it for employment or Board roles. It is also fairly common for Advisors to become actual investors in a company. This happens as a natural extension of the relationship between a CEO and an Advisor over time. This also provides Advisors with the ability to observe and conduct due diligence on the company before deciding to invest.

What is a Board of Directors?

A Board of Directors (BOD of the Board) is a group of people elected by the shareholders at the shareholders’ meeting by a majority of votes. The Board sets the strategy, oversees management and represents the interest of shareholders. The directors responsible are legally obligated to act in the best interests of shareholders and ensure the company's long-term success. The Board is not responsible for the day-to-day operation of the corporation. The officers of a corporation are responsible for the day-to-day operation of the corporation. The Board of Directors is responsible for the hiring and firing of the Chief Executive Officer of a corporation.

A corporation must have at least one Director. The number of Directors is specified in the articles of incorporation filed with the Corporate Registry (external) and in the By-laws of the Corporation (internal). An individual can be the sole shareholder, Director, and officer of a corporation. This is fairly typical for smaller, private, early-stage companies. The names of the Directors are registered with the Corporate Registry in the respective province/state or with Corporations Canada for federal corporations.



However, all public companies are legally mandated to install a formal board of directors, which carries specific responsibilities for financial oversight. Non-profit organizations and many private companies also usually appoint a board of directors, although they are not required to do so.

What are the Board of Directors’ responsibilities?

The scope of authority of the corporation’s management (the Directors and Officers) is so broad that the law imposes a wide range of duties, liabilities, and legal responsibilities on them. In Canada, the Canada Business Corporations Act (CBCA) governs corporations. In the United States, the majority of states have adopted the Model Business Corporation Act (MBCA) as the basis of their own laws. However, each of these states has modified the provisions of the MBCA. Canada and the USA share a lot of similarities. Provinces and states joined the confederation at different times in history. As such, these regions enjoy differing, special privileges, including the ability to establish some of their own laws and regulations.

In general, the duties and liabilities reflect the position of trust that Directors and Officers hold in relation to the corporation and its owners, the shareholders. While many of the duties and liabilities of Directors and Officers are prescribed in law, other duties and liabilities:



• are set out in other federal, and provincial/state or territorial statutes, or
• result from court decisions.

The primary duties and liabilities of the Directors of a Corporation are:

• Duty of care
• Fiduciary duty of loyalty
• Remain informed
• Prevent conflicts of interest
• Attend Board meetings
• Make, repeal and amend by-laws
• Appoint CEO and Chief Audit Executive (CAE)

The shareholders expect and trust the directors to conduct the corporation’s business in a way that will preserve and enhance the shareholders’ investment.

Decisions requiring Director approval and the mandate set out for the Board and any board-level committees are established in Committee Charters, supported by Committee Checklists that outline the Board Committees’ primary roles and responsibilities in a calendar format.

Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities. Although some decisions made by the Directors require the approval of shareholders, other important decisions can be made without such approval. These include major decisions such as appointing executives and voting on M&A proposals.

How to select advisory board members and members for the Board of Directors?

The selection process is fairly similar between the two boards. However, for obvious reasons, there is a lot more rigour associated with identifying, recruiting, and electing Directors within a company's industry. I will set those aside for the moment.

The process starts with taking an inventory of where you are on the company’s journey, the challenges that you are facing, the decisions that you need support with and so forth. This drives the determination of the competencies that an Advisor or a Director needs to possess. A Competency Assessment or Skills and Capabilities matrix provides a structured way to execute this assessment and to guide the Advisor's and Directors' selection process. In addition, the Board has legal requirements that they have to adhere to. For example, members of the Audit Committee at the Board level have to possess financial acumen. In addition, the Board adheres to the corporation’s set out CSR/ESG targets. The most pertinent one at the moment is in terms of gender, ethnic and race diversity.



Strength comes from diversity, so select Advisors and Directors with industry knowledge and diverse capabilities and points of view.

7 key differences between the Board of Directors and the Advisory Board

Both the Advisory Board and the Board of Directors provide strategic guidance and advice for the development of the company. Larger companies often utilize both a board of directors and an advisory board to provide business advisory services and increase shareholder value. However, there are substantial differences between the two, which we will detail below.

 Board of Directors

The Board of Directors is a formal body with legal authority and many fiduciary duties and responsibilities. It oversees the management of the company and makes decisions on major corporate issues. The Board often includes independent directors who do not hold executive positions within the company, ensuring unbiased oversight and governance.

Advisory Board

An Advisory Board, on the other hand, is an informal group of experts who provide valuable assistance to the company. They, as independent members, are not financially liable to the company or its shareholders, allowing them to offer candid advice without the constraints of legal obligations.

Public and Private Companies

In publicly traded corporations, the composition of the Board of Directors must include independent directors as required by the U.S. Securities Exchange Commission (SEC) rules. This ensures that the Board can provide objective oversight and protect the interests of shareholders.

1. Fiduciary Responsibilities and Liabilities

The primary difference between Directors and Advisors is that Directors are legally bound to represent a company's shareholders in a fiduciary manner and are liable for their actions and advice. As such, most corporations carry Directors' and Officers' liability insurance. On the other hand, there are no liabilities associated with taking the advice of an Advisor, and they hold no accountability to the shareholders.

2. The obligatory nature

Corporations are required by law to have an elected Board of Directors, even if that Board is composed of one member. Advisory Boards, on the other hand, are entirely optional as far as the law is concerned. There are no legal or regulatory requirements imposed on an Advisory Board member. The relationship, responsibilities, and obligations exist only between the Advisory Board member and the corporation, as set out in an Advisory agreement.

3. Nature of Advice

The type of advice that an Advisory Board can provide tends to be specific to a particular issue or set of issues and the strategy. They can also offer advice that could be directly to the corporation's founder. On the other hand, the advice offered by a Board of Directors encompasses the advice offered by an Advisory Board, plus all other matters of governance and oversight pertaining to the corporation.

4. Financial Compensation

Board of Director roles are almost exclusively compensated. The expectations, responsibilities and duties imposed on the Board are high, and they can be found personally liable if they do not perform their duties. The compensation is commensurate with the role and responsibilities. Thus, members of the Board of Directors are typically compensated much higher than Advisory Board members. The compensation mechanism is the same for both Boards.



Only in the non-profit, non-governmental sector do Board of Director roles tend to be volunteer-based.

5. Levels of Influence

The Board of Directors is a governing body that provides company oversight and is above the company's CEO. Directors are elected by shareholder vote and are accountable for serving the interests of both the corporation and the shareholders. For this reason, the Board of Directors has a greater influence over the company, its culture, and its growth than an Advisory Board.

6. Voting Rights

Another difference between the Advisory Board and the Board of Directors is the right to vote on company decisions. While the Board of Directors has voting rights and obligations, the Advisory Board does not. An Advisory Board can influence the decisions of corporations and their officers, but it cannot make decisions for the corporation.

7. Regulations

While an Advisory Board is not regulated by law, and its organization is therefore more informal, the work of the Board of Directors is governed by federal, provincial/state laws, securities and exchange commission’s rules and the by-laws of the corporation. External to the corporation laws set out the expectations and responsibilities for the Board of Directors, while the by-laws of the corporation set out, amongst other things, how many meetings per year the Board of Directors should have, what aspects of the company the Board of Directors should be involved in and how Directors are elected, etc.



The Board of Directors is a governing body that provides company oversight and is above the company's CEO. Directors are elected by shareholder vote and are accountable for serving the interests of both the corporation and the shareholders. For this reason, it has a greater influence over the company, its culture, and its growth than an Advisory Board.

Final thoughts

Although their purposes may be similar, there are major differences between an Advisory Board and a Board of Directors. Both Boards, at different levels, play a fundamental role in the success of a company. They can provide oversight and a valuable external point of view to help a company see the forest for the trees and understand or appreciate a larger situation/problem. However, it is only the Board of Directors that can set the guardrails and has legal responsibility, such as abiding by laws like the Sarbanes Oxley Act and disclosing conflicts of interest. The corporation is under no obligation to act on the advice of the Advisory Board.