Board of Advisors: Who Are They and What Is Their Role?
Whether you are the founder of a start-up faced with rapid business expansion or the owner of a small-and-medium-sized enterprise (SME) eager to identify the next growth opportunity, you may realise that your demand for managerial support is on the rise. One way to increase your company’s management capacity without incurring the costs of hiring a full-time management team is to create a board of advisors.
If you are interested, read on to find out more about:
- What is a board of advisors
- The differences between a board of advisors and a board of directors
- Whether a board of advisors is required for all companies
- Who can be on the board of advisors
- The roles and responsibilities of a board of advisors
- Whether advisors need to be paid a salary
- How are advisors appointed
- Whether advisors can also hold full-time jobs
- The length of an advisor’s appointment
- How can an advisor resign from their role/the company
What is a Board of Advisors?
A board of advisors refers to an informal group of professionals who render advice on the management of a company or an organisation. As an informal group, a board of advisors primarily plays a consultative role and does not have any decision-making power.
Given its informal nature, a board of advisors is not regulated by law and may be structured in any way that the business owner finds helpful for the company. It can consist of any number of individuals from any sector or role (discussed below), as long as the owner believes that these individuals can provide useful advice.
What are the Main Differences Between a Board of Advisors vs a Board of Directors?
When you first encounter the term “board of advisors”, you may wonder whether it bears any relationship with the more familiar term “board of directors”. In reality, these two boards are two completely separate structures of a company, and they serve very different purposes.
The key differences between a board of advisors and a board of directors are summarised in the table below. You may read on to find out more about the features of a board of advisors highlighted in this table in later sections of this article.
|Board of Advisors||Board of Directors|
|Duties/ Functions||A board of advisors renders advice to the company.||A board of directors makes important executive decisions for the company. Their decisions are binding on the company.|
|Degree of Formality||A board of advisors is formed informally.||A board of directors is a formal structure of the company and is regulated by law. They owe special legal duties to the company.|
|Manner of Constitution||Advisors are informally selected by the owner/founder/controller of the company.||Directors are elected by shareholders and formally appointed.|
|Voting Right||Advisors hold no voting rights and have no decision-making power.
They primarily serve in an advisory or consultancy capacity.
|Directors are eligible to vote in a board meeting. Decisions arising from board meetings (known as “Directors’ Resolutions”) directly impact the running of the business.|
|Typical Membership Profile||Advisors are typically experts selected from relevant fields.||Directors are typically elected to represent various interests (e.g., interests of majority shareholders, minority shareholders and creditors). They often require assistance from industry experts or specialists to oversee business operations.|
|Method of Compensation||Advisors typically receive stock-based compensation, such as options. Sometimes advisors are not paid any financial compensation (e.g., in the case of non-profit organisations).||Directors are usually paid a fixed salary.|
Is a Board of Advisors Required For All Companies?
As you may be able to guess from its informal and unregulated nature, having a board of advisors is not a legal requirement in Singapore. Companies can decide for themselves whether to constitute a board of advisors, according to their needs.
Who Can be on the Board of Advisors?
While there are no hard and fast rules on who to select as an advisor, a board of advisors tends to include a mix of professionals across different sectors (e.g. public, private or non-profit) and roles (e.g., a legal advisor, a financial advisor, a Human Resource manager, a business strategist, and a marketing advisor).
In real life, the selection of appropriate advisors would largely depend on your company’s particular needs.
For example, CRIB, a local non-profit organisation aspiring to empower female entrepreneurs, has a board of advisors comprising 6 prominent female professionals from both the public (e.g. Minister Grace Fu) and the private sectors (e.g. Ms Claire Chiang, BBM). This is because the entrepreneurial culture requires both familiarity with state policy initiatives and private business acumen. Additionally, the all-female composition of the board allows CRIB to stay true to its branding as an organisation “helmed by women, for women”.
From the composition of CRIB’s board of advisors, you can see that a board of advisors are selected to suit an organisation’s unique needs, based on its nature and activities.
To further illustrate, representatives from downstream retailers may be brought in as advisors if a retail company wishes to understand its customers’ concerns better. A tax specialist may be included if the company is involved in a business area where there is a need to understand and appreciate the relevant tax laws or regulations that might affect the company.
Regardless of who you select as an advisor, the expertise contributed by the advisors should jointly add to the company’s pool of skills and knowledge.
What are the Roles and Responsibilities of a Board of Advisors?
The specific roles and responsibilities of a board of advisors depend on the needs of your company. In general, a board of advisors can play a key role in a company’s business development and boost investor confidence.
A board of advisors can contribute to the expansion of your company in two major ways.
First, as your company expands, it needs to handle increasingly technical and specialised issues. Advisors with relevant expertise can step in to address these problems. For instance, a newly incorporated start-up may rely on online contract templates to structure simple transactions. However, an advisor from the legal sector can oversee more complicated financing transactions to avoid potential disputes.
Second, advisors may potentially link their own business network with your company and create new business opportunities. For example, a company specialising in manufacturing may hire an advisor who used to work in the upper management team of a retailer. In addition to providing advice from a retail perspective, the advisor can also connect his existing clients to the company, thereby bringing in new customers and business opportunities.
Attracting investors and confidence in the company
The presence of a board of advisors means that a company is well-advised by business veterans. This can bolster the image of a newly found company and boost investor confidence.
Do the Advisors Need to be Paid a Salary?
Advisors do not have to be paid a salary. However, when they do, they usually receive stock-based compensation, such as options, which allows them to benefit from an increased valuation of the business.
Such options typically allow an advisor to buy the company’s shares at a fixed price on a future date to be determined by the advisor (though usually within a set time frame). For example, if an advisor is granted an option to purchase 500 shares at $50 per share within 3 years, they can purchase the shares when the market price is significantly higher than $50 per share (e.g., at $80 per share), and earn the price premium. As such, the advisor will be incentivised to help the business increase its valuation.
How is a Board of Advisors Appointed?
Since a board of advisors is informal in nature, they are selected by the owner of the company rather than appointed through a formal process.
As the owner of a company, you are free to structure the board of advisors in any manner as you deem fit. However, you should take into account the following considerations:
- Advisors should not be chosen simply because they are well-acquainted with the owners of the company. The focus should be on their relevant experience, expertise and knowledge.
- Having too many advisors on the board can put a financial strain on a small company if they are all compensated financially. It can also lead to conflicts in viewpoints as different advisors may have different opinions. Quality is more important than quantity.
- Family members of the owners should generally not be included on the board. This is because a board of advisors is meant to bring in an outsider’s perspective to the company. Personal connections between the advisors and the owners may cloud the advisors’ objectivity and professional judgment.
Can Advisors Also Hold Full-Time Jobs?
There is no rule or law against advisors holding full-time jobs in other companies. In fact, it is often helpful to have advisors who occupy influential full-time positions in their respective fields. This reassures potential investors that the advisors are familiar with the business practice in their field and are capable of providing relevant advice to your company.
However, when you approach a potential advisor, you should ensure that the advisor would not be in any conflict of interest by taking on an advisory role in your company.
For example, if your advisor is also a manager in one of your suppliers’ companies, he will be in a position of conflict of interest when the two companies are negotiating a sales contract. Given his connection to your company, he may be inclined to give your company more concessions, which may go against his duty as a manager of that company. If you are unsure whether your advisor is/ will be in a conflict of interest, you may consult a corporate lawyer to address your queries.
What is the Length of an Advisor’s Appointment?
As the owner of a company, you can freely negotiate with your advisor on their length of appointment. However, it is important that you include this as a term in your contract with the advisor.
This is because if the contract does not state a specific appointment term, disputes may potentially arise between your company and the advisors on the length of their appointment.
How Can an Advisor Resign From Their Role/the Company?
An advisor can resign from their role based on termination clauses set out in their contract with your company. If the contract does not specify a method of termination, disputes between your company and the advisors over how and when to terminate the advisory relationship may potentially ensue. Therefore, it is important to include a termination clause in the contract.
The constitution of a board of advisors should contribute to the practical needs of a company. Therefore, the selection of advisors should not be formalistic. Each and every advisor placed on the board should bring in knowledge and skillsets that are important to your company’s operation and growth.
When engaging an advisor, a company should ensure that there is no conflict of interest between the candidate’s formal employment role and their role as an advisor to the company. Moreover, the contract between the company and its advisors should be clear, detailed, and concise, so as to avoid future disputes. A corporate lawyer may be engaged to iron out these issues.
If you have further questions or require any guidance or advice on the selection of advisors, you may wish to consult a corporate services firm.
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