Because many of the successful individuals I mentor, either currently or in the future will find themselves presenting to, or interacting with, members of the board of directors of their companies, I like to prepare them by educating them on the significant differences that typically exist between corporate boards and advisory boards.

When it comes to guiding organizations, both corporate boards of directors and advisory boards play essential but distinct roles. Understanding their differences can provide clarity for businesses and their employees looking to navigate governance and advisory structures effectively.

Fiduciary Responsibilities

Corporate Boards of Directors: Members of a corporate board have clear fiduciary responsibilities. They are legally obligated to act in the best interest of the shareholders, ensuring that the company operates profitably and ethically. This includes overseeing management, approving major corporate strategies, and ensuring compliance with laws and regulations.

Advisory Boards: In contrast, advisory board members do not have formal fiduciary duties. While they are expected to provide guidance and expertise, their role is typically less formal and not legally binding. They offer insights and recommendations but are not accountable for the company’s legal obligations.

Decision-Making Authority

Corporate Boards of Directors: Directors possess significant decision-making authority. They can make binding decisions on behalf of the company, including financial allocations, strategic initiatives, and executive appointments. Their authority can extend to approving mergers and acquisitions or other significant capital expenditures.

Advisory Boards: Members of advisory boards primarily serve in a consultative capacity. They provide strategic advice and feedback, but they do not have the authority to make final decisions or take actions on behalf of the organization. Their input can influence decisions made by the corporate board, but it is not mandatory.

Compensation

Corporate Boards of Directors: Directors in for-profit organizations are typically compensated for their service. According to a 2022 study by the National Association of Corporate Directors, average annual compensation for directors of public companies was around $300,000, while private company directors earned about $160,000. Non-profit boards often provide minimal or no compensation, focusing instead on the personal and professional satisfaction of serving.

Advisory Boards: Compensation for advisory board members varies widely. In for-profit settings, members may receive a stipend, equity, or other forms of compensation, though it is often less than that of directors. In non-profit organizations, advisory board roles may be unpaid, relying more on volunteer expertise and commitment.

Liability Risks

Corporate Boards of Directors: Members face potential liability risks, particularly concerning their fiduciary duties. They can be held accountable for breaches of duty, mismanagement, or violations of securities laws. Directors are often protected by Directors and Officers (D&O) insurance, which mitigates personal liability risks.

Advisory Boards: Advisory board members generally face lower liability risks due to the lack of fiduciary responsibility. However, they should still exercise caution and diligence in their advice, as any negligence could lead to reputational damage or other consequences.

Best Practices: Corporate Boards of Directors

Committee Structure: Corporate boards often employ a committee structure to facilitate efficient governance. Common committees include:

• Audit Committee: Oversees financial reporting and compliance.
• Compensation Committee: Determines executive pay and benefits.
• Nominating/Governance Committee: Focuses on board member selection and governance practices.

Each committee typically consists of independent directors and reports its findings to the full board, ensuring transparency and accountability.

Executive Committees: Some boards establish executive committees, usually composed of key board members, to make decisions between full board meetings. These committees are often empowered to address urgent matters and streamline decision-making, though their authority is limited by the bylaws and they must report back to the full board.

Engagement with Management: Best practices encourage regular interaction between the board and management. This includes:

• Scheduled presentations by executives on key initiatives.
• Open lines of communication to discuss strategic direction and operational challenges.
• Opportunities for board members to engage with various levels of management, fostering a deeper understanding of the organization’s operations and culture..

Best Practices: Advisory Boards

Committee Structure: Advisory boards generally do not have a formal committee structure like corporate boards. However, they may establish working groups for specific projects or areas of focus, enabling members to contribute their expertise effectively.

Engagement with Management: Advisory board members should maintain an open dialogue with management. Best practices include:

• Regular meetings to discuss strategic goals and industry trends.
• Inviting management to participate in discussions to ensure alignment on objectives.
• Encouraging feedback and suggestions from advisory board members to enhance decision-making.

Composition and Statistics

Corporate Boards of Directors

• Typical Size: Average size is around 11 members for public companies, with 7 to 15 members being common.
• Terms of Service: Directors typically serve 1 to 3-year terms, with the possibility of re-election. Continuous service can depend on company bylaws.
• Mandatory Retirement Age: Many corporate boards impose a mandatory retirement age, often around 72, to promote board refreshment and diversity of perspectives.

Advisory Boards

• Typical Size: Advisory boards usually consist of 5 to 10 members. However, in the case of highly prestigious non-profit advisory boards the typical size can be much larger, often in excess of 20 members.
• Terms of Service: Terms can vary significantly but often range from 1 to 3 years, with potential for renewal based on mutual agreement.
• Mandatory Retirement Age: Advisory boards do not typically enforce a mandatory retirement age, allowing for flexibility based on individual member contributions and organizational needs.

Conclusion

In summary, both corporate boards and advisory boards have unique structures and best practices that guide their effectiveness. Corporate boards benefit from formal committees and established engagement protocols, while advisory boards thrive on flexibility and expertise sharing. Understanding these dynamics, including composition and terms of service, can help organizations make informed decisions about governance and advisory frameworks.