Board of Directors & Board of Advisors: Who's Who?Jan 03, 2023
Each board has a specific role to play in your corporation. The Board of Directors is elected by the shareholders and has various legal duties to the corporation. Whereas the Board of Advisors can be appointed directly, they do not share the same legal duties that directors do. Startups can have both boards to help them on their journey. This article will briefly outline each board in more detail.
Board of Directors
The process for electing the Board of Directors and the duties the directors possess are set out in a Corporation’s Bylaws and possibly Shareholder Agreement. Directors must be elected by the shareholders; this creates a fiduciary duty to the shareholders to act in the corporation’s best interests. It is extremely important to consider consulting an attorney to assist you in preparing these documents, as directors have great power while managing the corporation.
The Board of Director’s also are bound by two additional legal duties, the Duty of Care and Duty of Loyalty. The Duty of Care requires directors to prudently manage the assets of the corporation, or in other words, act in good faith on behalf of the corporation. On the other hand, the Duty of Loyalty requires directors to make all decisions and act in a manner that benefits, or furthers the mission of, the corporation.
Some of the main duties of the Board of Directors include hiring, and firing, the CEO, approving a sale of the corporation, approving financing and stock plans, and even approving compensation for corporate officers and employees.
Board of Advisors
The Board of Advisors is simply a group of advisors. These advisors are important because the members can bring credibility and prestige to the corporation. These advisors are selected personally by either a director of the Board of Directors or the CEO. The recommendations of advisors do not bind the corporation. The Board of Directors and CEO can accept or deny the recommendations as they see fit.
The Board of Advisors possesses no fiduciary duty, Duty of Care, or Duty of Loyalty to the corporation. This means that advisors have no legal duty to act in the corporation’s best interest. Stated another way, shareholders that are damaged by the advisors’ recommendations have no legal redress.
Advisors usually have full time employment with a third party and are on the corporation’s Board of Advisors ad hoc when meetings are called by the corporation. The Board of Advisors usually makes recommendations on the overall strategy of the corporation.
A Final Thought
It may seem like a far-off thought as you are starting your corporation to be planning for the strategic recommendations of a Board of Advisors or weighing the possibility of a proxy fight of your shareholders to control the Board of Directors, but to prepare for these situations it starts with your initial governing documents. We strongly recommend consulting an attorney to assist you in drafting these initial documents. If you have any questions regarding your Board of Advisors or Board of Directors, then reach out to The South Texas Business Lawyers today.
Written By: Connor McQuage