When hearing the terms board of directors and board of advisors, have you experienced confusion in identifying exactly what each board does and who is a part of each board? If so, this article will serve to clarify why companies need these boards and how they are different from each other.
What is a board of directors?
When a company goes public, they are then required to have an official board of directors, which gives representation to the stockholders. The board is a group of individuals comprised of representatives elected to give a voice the stockholders, as well as the management. The presence of both stockholders and management, creates a balance between the interests of both parties. If one party dominates the board, it is likely they will have more power on the decisions. The boards meet to establish policies and decide on issues which include the following:
As you can see, balanced representation is important to reach decisions which equally benefit shareholders, as well as the management within the company. Any public company is required to have this board in place.
What is a board of advisors?
On the other hand, a board of advisors in a much less formal and unofficial group of individuals with expertise who are in place to advise a business. This board is not required, but can be very beneficial. The board members consult with the board of directors, employees and managers of a business on a variety of issues. These may include, but are not limited to:
A great board of advisors will include people with experience and expertise in the specifics of running a business. For example, a business owner would want to hire an attorney, a financial expert, a human resources professional and so on. In this way, the business is exposed to advice from experts with an objective view. The board of advisors are not working in the interest of anyone or anything other than the business and are often unpaid.
Differences between board of directors and board of advisors
In short, a board of directors has a legal responsibility and obligation to work in the interest of the shareholders, checked by the management of a company. They do not work FOR the corporation, but serve as a liaison of sorts between the shareholders and the company. A board of advisors is a group of people selected by the CEO or owner of a business with the sole responsibility of consulting and giving advice to help the business. They work FOR the business and have no obligations outside of helping the business. A board of advisors, as mentioned above, may even advise the board of directors in their decisions.