The Formal Board vs. The Advisory Board

Many family businesses in recent years have recognized the value of having some sort of deliberative peer body to provide advice and guidance to management. In some companies that body takes the form of a legal board of directors with a majority of independent outsiders chosen for their business experience and expertise. Other companies, aware of what appears to be a surge in litigation against corporate directors in recent years, have preferred to set up an advisory board of experienced outsiders.

The choice of an advisory board rather than a formal board is usually based, in part, on the owner’s belief that it is easier to attract top talent to a body that presumably has no fiduciary responsibility and therefore cannot be held legally liable for its actions. Serving on an advisory board may no longer be entirely risk-free, however. If an advisory board functions like a board of directors—for example, when the CEO consistently follows board recommendations that are not well founded—the members could run the risk of litigation, if not liability.

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