Advisory Boards

Every company in India, whether listed or unlisted, is required to have a Board of Directors. There is an increasing trend for many companies to also have an Advisory Board, in addition to this fiduciary Board. As against a Board of Directors, which has fiduciary roles and responsibilities, an Advisory Board is an informal group of experts, each of whom is a subject matter expert. The main purpose of this Advisory Board is to provide advice and guidance to the top management, to help run the business of the company more effectively. An Advisory Board is not a substitute to the Board of Directors, which has authority derived from law, and which has to safeguard the interests of various stakeholders of a company. An Advisory Board’s key role is to help top management run the business more effectively.

The concept of Advisory Boards is catching up in India for a number of reasons.

  • Board of Directors cannot be a Board of consultants. The focus while choosing the Directors cannot be on their expertise alone. In the case of an Advisory Board, the members are chosen on the basis of their expertise alone. As a result, an Advisory Board will have expertise which the Board of Directors may not possess.
  • Advisory Board comprises professionals who assist the top management in furthering the business of the company.
  • With a number of liabilities attached to the Board of Directors, Advisory Board members do not have to be anxious about any liability under any law. As a result, a number of experienced persons are willing to serve on Advisory Boards, but not on Board of Directors.

The Board of Directors continues to be at the apex of the company. The Advisory Board does not have any formal position in the formal hierarchy of the company. Any advice that the Advisory Board may make, would be to the top management alone. The top management reports to the Board of Directors, but they can go to the Advisory Board for their advice or feedback before approaching the Board. Also, there is limited interactions between the members of the two Boards, since the role of Advisory Board members is mostly to advise management personnel.

Advantages of constituting an Advisory Board

  • Distance control – MNCs, having operations in different international jurisdictions, prefer having an Advisory Board, comprising experts, with the Board of Directors comprising internal persons. With this arrangement, they are able to gain from the expertise of experts, while keeping the control with them.
  • Startups and small organisations – While experts may be willing to act as Advisors or serving as an Advisory Board member of such companies, they may not be willing to serve on the Board of Directors, inter alia because of limited compensation. With this arrangement, startups and small organisations can benefit from the expertise of these persons.
  • Higher efficiency – Since an Advisory Board is an informal set up, the meetings can be less structured/ formal and can be convened at such intervals as the management may find necessary. Also, these meetings not being mandated by laws and regulations, would be more flexible.
  • Benefit of collective wisdom – Instead of appointing Advisors for each area of expertise, the Advisory Board can provide advice as a collective.
  • Compensation – Advisory Board members can be compensated on the basis of their expertise, without there being caps imposed by law and regulations.

Disadvantages of an Advisory Board

  • Alternate power center – Advisory Board may emerge as an alternate power center to the Board of Directors.
  • Interaction between the 2 Boards - With the two Boards rarely interacting with one another, top management may find it difficult to implement some suggestions.

On balance, Advisory Boards can add value, since they enable access to experienced persons, who for reasons of increasing liabilities, would not be interested in serving on fiduciary Boards.

 

Shikha Shah