There are two key Board structures which you will commonly encounter, the advisory board and the formal Board. The answer as to which Board is right for you will depend on which stage you are at in your business journey and what type of support you are seeking.
For many businesses in the start-up phase, an advisory Board is the perfect vehicle to receive support and guidance from experienced professionals.
An advisory Board is an informal, flexible arrangement that is best utilised to fill in the gaps of knowledge needed during the stressful start-up phase. It can meet as often as you require and the agenda is driven by the needs of the owner(s) of the business. The main role of the advisory Board is to help problem solve and provide a strategic structure, without requiring the owner to relinquish decision making control.
Advisory Boards are non-binding, have no authority to govern or voting rights. It has no delegation authorities, cannot pass resolutions or direct management. It only makes recommendations.
A formal Board directs management and is responsible for all business decisions, strategic outcomes and setting the culture of the business to ensure, at a minimum, compliance with the law. Individual directors can be liable personally for breach of certain laws, such as Consumer and Competition laws. Here, the regulator, ACCC, will look to prosecute Directors if they see evidence of anti-competitive behaviour such as price fixing, rigging bids on tenders, restricting the volume or type of goods to create scarcity to increase prices or being involved in a Cartel (competing businesses agree to act together to drive up profits while pretending to be in competition). Such behaviour can see an individual director face up to 10 years in jail, fines of up to $420,000.00 per offence and a financial penalty of up to $500,000.00 per civil breach. Corporations face fines up to 410 million. Further, Directors of a formal Board have fiduciary obligations regulated under the Corporations Act.
In a formal board structure, the Board is the employer of the CEO. This is in contrast to the advisory Board, which acts as a consultant with the business owner retaining full control. Instead, a formal Board can be considered as a decision making model.
In fact when you think about it, the term advisory Board can be misleading. It is, essentially, a team of professional individuals coming together on a consultancy basis to provide advice utilising their experience, knowledge and contacts. Under current law, the advisory Board does not assume any responsibility for the outcome of any decisions that they make, as it is up to the Business owner at their discretion to either accept or reject their advice.
That said, the status of the advisory Board will depend on its activities, rather than the intent of establishment. Whilst advisory Board members traditionally don’t have the same liability as governing Board members, they can do if clear boundaries are not set and roles/ responsibilities are not defined and more importantly, maintained. The extent of involvement, influence and responsibility assumed will ultimately determine the status of the Board.
There are a number of factors which need to be considered when you are deciding which type of Board structure might best suit your business. We look forward to working with you to ensure you have the right governance structures in place to maximise your success.
This article was written by Partner, Joanna Andrew.
Practice Area: Corporate, Commercial & Business