The advisory board is an informal panel of experts and other people who are interested in seeing the new venture succeed. They are a useful and less costly alternative to a formal board of directors, Advisory boards can range from those that meet once or twice a year and do not get paid, to those that meet more regularly and are provided honoraria per meeting.
Advisory boards are often used when a board of directors is not required or in the start-up phase when the board of directors consists of the founders only. An effective advisory board can provide the new venture with needed expertise, without the significant costs and loss of control associated with a board of directors.
In a wholly owned or closely held corporation (in which the entrepreneur or team holds all the stock), there is really no distinction between the functions of a board of directors and those of the board of advisers, because in either case, control remains in the hands of the entrepreneurial team. The advisory team is not subject to the same scrutiny as the board of directors, because its actions are not binding on the company.
Entrepreneurs tend to resist the idea of having outside advisers because of the founders’ intense desire to be independent and to maintain some secrecy about the business. Entrepreneurs also tend to believe that an outsider could never understand the business. Although many business owners may reject a formal board, they risk developing “tunnel vision” unless they consider using an advisory board.
An advisory board is a step in the direction of creating a more professional organization that exhibits:
- Shareholder harmony, achieved through shareholder agreements and buy-sell agreements.
- Effective management has a vision and goals for the company.
- Efficient internal communication, achieved through shareholder meetings, advisory board meetings, and management meetings.