Meeting and working with numerous business owners, I often get asked the question, “Does a board makes sense for my business?” As a business owner, I find great value in seeking outside expertise and perspectives to assist me with my business. But when should an owner take the next step and add an advisory board or fiduciary board of directors?
Before deciding to add a board, consider your “why” for putting one in place.
Business maturity – has your business become more complex that you could benefit from the insights and expertise of a diverse board?
Strategic crossroads – are you looking to enter new markets, launch a new product line, or considering a merger or acquisition where a board could provide the necessary expertise and oversight to navigate these challenges?
Scaling operations – is your business experiencing rapid growth and needs to scale its operations, where a board can offer insights into best practices, industry trends, and regulatory compliance?
External funding – are you seeking external funding from venture capitalists, private equity firms, or other investors?
Succession planning – is the founder or CEO planning for a future succession and wanting to ensure a smooth transition of leadership?
If you’ve decided adding a board is the right move, you next need to consider if an advisory board or a fiduciary board would be the right fit. Let’s look at the distinctions and purposes of each.
An advisory board consists of external experts such as industry veterans or individuals with specialized knowledge who provide non-binding advice, insights, and recommendations to the business owner or management team. Key considerations:
Expertise and insights – An advisory board can offer diverse perspectives and expertise that may be lacking within the internal team. This can be particularly beneficial when the business is facing specific challenges or seeking to capitalize on new opportunities. For example, if a business is looking to acquire, expand into a new market, or improve its sales efforts, they may pull in experts in these areas to help advise the owner(s) and management.
Flexibility – Advisory boards are less formal and have no legal fiduciary responsibilities. This allows for more flexibility in terms of structure, meeting frequency, and engagement. Members may participate on a more part-time or project-based basis.
Specialized Guidance – If your business is in a niche industry or is navigating complex regulatory environments, an advisory board can provide targeted guidance from individuals who are experts in those areas.
Networking – Advisory board members often bring with them valuable networks and connections that can help the business access resources, partnerships, and potential customers.
Innovation and Creativity – Advisory board members who are not bound by fiduciary responsibilities might feel more comfortable offering unconventional or creative ideas without the pressure of direct legal obligations.
A fiduciary board on the other hand, more commonly known as a board of directors, has legal responsibilities and obligations to the company and its shareholders. This type of board is more formal and typically consists of both internal (executives and management) and external (independent) directors. Key considerations:
Governance and Oversight – A fiduciary board is responsible for overseeing the company’s management, ensuring compliance with laws and regulations, making major strategic decisions, and protecting the interests of shareholders.
Accountability – Fiduciary board members have legal duties, including fiduciary duties of care and loyalty, to act in the best interests of the company. This accountability can provide enhanced governance and transparency.
Risk Management – A fiduciary board plays a key role in risk assessment and management. The board’s diverse expertise can help identify potential risks and develop strategies to mitigate them.
Strategic Direction – Fiduciary boards are deeply involved in setting the company’s strategic direction, approving major investments, and ensuring alignment with long-term goals.
Investor Confidence – The presence of a fiduciary board can increase investor confidence, especially when seeking external funding or pursuing an initial public offering (IPO).
So which one is right for you and your business?
Typically, an advisory board is best suited when you seek specific expertise, insights, and guidance without the formal governance structure of a fiduciary board. It allows much more flexibility for the owners and management, as they are not accountable to an advisory board but rather have them available to support and guide, as needed.
On the other hand, a fiduciary board is more appropriate when you need legal oversight, accountability, and strategic direction. Typically, these are put in place when there are multiple owners who are both active and passive, an Employee Stock Ownership Plan, or where there may be an absentee owner with management leading the business.
Some businesses may choose to have both types of boards to balance strategic guidance and governance.
It is important to note that while adding a board, either advisory or fiduciary, can offer many benefits, it also comes with responsibilities and potential challenges. As a member of several boards, I find that business owners who carefully consider the composition of the board, establish clear roles and responsibilities, and create communication channels between the board and management can successfully achieve their goals.
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Jayne McQuillan, CPA, MBA, Certified Exit Planning Advisor (CEPA) is the owner of Journey Consulting, LLC
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