When boards of advisers are better than boards

Many family businesses will opt for a board of advisers of sorts over a board of directors. There’s a simple difference. 

A board of directors is a legal requirement and has fiduciary duties to the shareholders of the corporation. A board of advisers is not a requirement and bears no legal responsibility to the shareholders of the corporation.

A board of directors is elected and looks after the governance of the company. A board of advisers is selected by the business owners and, as the name suggests, provides advice.

A board of directors has a fiduciary duty, while a board of advisers has no legal liability.

A board of directors is insured by the company, but boards of advisers tend to be uninsured. Boards of directors tend to be well-compensated; not so with boards of advisers.

That said, most boards of advisers are so informal that they don’t actually exist. What you have instead is a group of advisers who will meet monthly or bi-monthly and provide some guidance, for a small fee. Some don’t even call it a board. Family businesses we contacted said they did not have boards of advisers per se but used advisers.

An important transition tool

Fotini Kypraios, from law firm Meerkin & Apel, said most firms were reluctant to use the word “board” because it implied a certain level of governance and liability. But she says it is an important transition tool for professionalising the business and appointing them as independent directors.

"An advisory council is a way to dip their toe in the water," Ms Kypraios said. "It’s a step to having a professional family board."

Boards of advisers are attractive to family businesses because they can help fill gaps in the knowledge of the owners, at little cost or investment.  An owner might be strong in sales but be weak in operations or finance. A member of the board with a background in operations or finance could share their expertise. Boards of advisers could provide invaluable assistance in areas like mergers and acquisitions, human resources, supply chain management and overseas sales.

Other reasons for setting up a board include transition. One prominent Melbourne family business, which did not want to be identified, said it is in the process of setting up a board of advisers because the founder is in the process of stepping back from the business and his sons are stepping in.

“We are going through a transitional process where I have sons in the business, they have directorships and senior roles within the business and I am transitioning out of the business, and so we’re looking to have some more experience at the table,” the founder said.

The board of advisers, the “Clayton’s board”, is perfect for family businesses that aren’t yet ready for a full-time board of directors. It can do the work of the normal board, reviewing strategy, business results, performance and providing strategic advice, but there is no decision-making authority; it can only make comments and recommendations.

A board of advisers is also a good place to begin for family members to learn the skills of being a director later on down the track.

Getting the right mix

The mix of people on the board of advisers should reflect the skills the business requires to move forward, and it can complement the board of directors. They don’t have to come from that particular industry. What’s required is a willingness and capacity to provide objective expertise to guide the business. As a rule, boards of advisers should not include suppliers or vendors to the company, friends and family with no expertise to contribute, and anyone who is already over-committed.

The advisers should be able to able to provide frank and fearless counsel so there’s no place for ‘yes-men’. Many companies have advisory boards serving one-year terms. It is also important for advisory board members to understand the governance process.

Paul Lucas, from law firm Coleman Grieg, says boards of advisers frequently overstep the boundaries and start acting as boards. At this time, he says, the family would have to change the status of the group and turn it into a formal board of directors, which would mean they would have to take on legal liabilities. He says most family companies don’t do it. The problem is that once advisers start acting as officers of the company, they become liable under the Corporations Act. Under the law, the definition of officer is a lot wider than director, something all family businesses need to take into account.

Bruce Auld, from Bentleys, says many boards of advisers will include figures like the company lawyer and accountant, financial planners and outsiders with expertise. Usually they will meet at least once a quarter, coinciding with the time the Business Activity Statement is put together. “That’s the most common, otherwise it’s every six months,” Auld says.

He says boards of advisers can be used to create a context when there is a transition.

“The core issue is they are trusted advisers and the trusted advisers will usually include the accountant, financial planner and to some degree the lawyer and people from outside the general mainframe, outside looking in.”

But the bottom line, in the end, is that the advisers are there purely to advise; the board and shareholders are the ones that decide. When the lines cross over, there has to be an adjustment.