A Gem From Jack Eberenz – Boards Of Directors And Advisory Boards: Types And Uses

Boards Of Directors And Advisory Boards: Types And Uses

This is the second in a series of articles dealing with why you should have a board of advisors and how to use a board to your best advantage.
BOARDS OF DIRECTORS AND ADVISORY BOARDS: TYPES AND USES.
In the simplest form there are two kinds of Boards, Statutory and Advisory. They can have a number of variations to fit specific circumstances. For instance, a statutory board for a company that has one owner, really becomes much more of an advisory board. Why? Because a statutory boards’ primary objective is to protect the shareholders. If there is only one shareholder, then the statutory board becomes a support base to the owner similar to an advisory board. Let’s take a look at the types of boards and their duties:

STATUTORY: WORKING FOR THE COMPANY
* Fiduciary responsibility
* Responsibility for management succession
* Evaluate performance of CEO’S and key executives
* Review and approve major corporate objectives, policies, budgets and strategies

ADVISORY: WORKING FOR THE OWNERS/CEO
* Good way for wary CEOs to test drive a board
* Advisors don’t get ensnared in minutia of audits, compliance, regulatory matters.
* There is minimal liability
* Advisors serve at the pleasure of the owner/CEO. Instead of advisors having the power to fire the CEO, the CEO can fire the advisors.

As you can see from this short overview, the Statutory Board is working for the success of the company, but more important, specifically for the success of the shareholders. In recent years we have seen more emphasis placed on “stakeholder” interests expanding the boards’ role to take positive action on all kinds of things such as customers, suppliers, the environment, social issues and whatever someone wants to define as someone with a “stake” in the success of the company. The role of statutory board member has always been complex and challenging, working from the outside to help guide a company and hold management responsible for their actions. In today’s business environment it is even more complicated.

An advisory board does not have the same responsibilities as that of a statutory board. An advisory boards’ job is advising the President/owner in making good choices and brings new resources to the company. Sometimes a simple introduction to a new source of supply, or asking the right question at the right time can change a company.

While assisting a company in strategic planning, I put the goals of all the departments on the walls of the conference room. When the participants stood back and looked at the goals they felt a real sense of accomplishment until I asked why sales has listed hundred of thousands of dollars in third quarter sales for a product that engineering said they could not have ready until the fourth quarter. They had to go back to the drawing board, but in previous years, this company would have charged ahead with its’ plan that had a fatal flaw. An outsiders’ eye can be very valuable.

Advisory board members have minimal liability as long as they stick to their role. They serve at the pleasure of the chief executive for their support and advice. A good advisory board member might make a good statutory board member when the company is ready to make such a move.

Mr. Eberenz has been the President of the Arizona Corporate Governance Institute, a principle in Lundstrom -Eberenz a turnaround management firm, a business consultant, business owner, President and Chairman of the Board of companies. You can reach him at [email protected] or 602-625-5105.

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