What is an advisory board? An advisory board is a select group of "independent" people who provide advice and support to the owners/ shareholders/directors of a business.
They provide non-binding strategic advice to organisations and hence are informal in nature. This gives greater flexibility in how they are structured and managed, when compared to a board of directors.
Whereas formal boards of directors have legally defined responsibilities, advisory boards are not regulated under the Corporations Act or corporate governance codes. Advisory boards advise. They do not make decisions like a formal board. However, calling a board that has a governance function an 'advisory board' will not preclude its members from their legal duties.
Why establish an advisory board? An advisory board enables the owners or managers of the business to have access to an independent view and/or a "safe" place to discuss issues of major significance. The role of the advisory board will evolve over time, but it is useful to document a charter to provide some direction for its members.
According to Heidrick & Struggles forthcoming 2017 edition of Board Monitor, advisory boards can provide a fresh perspective on strategy, economic trends, and specific geographic markets and regulatory requirements.
Advisory boards can alter boards to issues that may not be on the radar and can also provide the CEO with a sounding board for new ideas, potential mentors and a wider network of high level contacts around the world.
Heidrick & Struggles suggests the following as potential approaches to consider when establishing an advisory board:
• Be clear about aims. Unlike boards of directors whose aims are established by law, advisory boards are free to focus on strategy or business critical areas. That focus should always be clearly defined. For example, topics include cyber security or big strategic issues.
• Clearly define relationships. Draw a clear line between the role of the advisory board and the board of directors. The advisory board offers advice but it does not make decisions. It also should not fill gaps in the board competencies such as financial acumen.
• Draft a charter. This document should cover the boards structure, responsibilities, terms of service and limitation of authority as an advisory board. Advisory board members are not directors for purposes of the Companies Act or other relevant legislation. This document is usually much shorter than a board charter.
• Agree the appointment process of advisory board members. This may include members being proposed by the Chair of the board of directors, a director or CEO (possibly also in consultation with relevant senior executives where the advisory board may focus on). In the end, advisory board members should be approved by the full board.
• Manage the board composition to ensure the appropriate mix of skill sets. These members skill sets should be complementary to each other and as a group address the purpose of the advisory board.
• Communication is critical. Keep members informed because typically advisory boards only meet two to four times per year. These members have less contact with management than the company directors.
• Information and documents. Meetings should be organised for maximum effectiveness and efficiency. Having a clear agenda is important to keep the meeting on track.
• Feedback from members. Define the form the output of the advisory board will take. For example, It may be recommendations, general observations or meeting notes summarising key points discussed.
• Term limits. You should consider term limits to ensure the group is occasionally refreshed to remain valuable with fresh ideas.