My sister wants to bring in an advisory board. What is the difference between an advisory board and a board of directors?

The FamilyBiz Q&A column provides answers to your family business-oriented questions from the subject matter experts at Thomas D. Davidow & Associates.

My sister wants to bring in an advisory board. What is the difference between an advisory board and a board of directors?

This week’s FamilyBiz Q&A column is by TD&A family business consultant George Burns.

A board of directors has obligations imposed automatically by state law. These include the duty of diligence and the exercise of reasonable care, including the assumption of fiduciary duty. Fiduciary duty is a very high level of loyalty. On the other hand, an advisory council has only those obligations that are expressly agreed upon by the members of the council. Members of the council do not automatically take on fiduciary or other serious duties applicable to formal directors.

Because a formal director takes on such liability, many candidates for service on a board decline to serve unless the company provides directors and officers liability insurance coverage. Because such coverage can be costly, many companies miss out on the opportunity to recruit good directors. Many companies work around this by having such prospects serve as members of an advisory council. Advisory council members can have obligations that are tailor-made based on the wishes of the company.

Thomas D. Davidow is the founder and principal of Thomas D. Davidow & Associates. www.tdavidow.com Dr. Davidow has more than 30 years of experience working with hundreds of national and international family controlled enterprises. He has worked with businesses in diverse fields including retail, distribution, manufacturing, real estate, construction and more.

If you would like speak with Dr. Davidow, he can be reached at (617) 739-2868 or by email at tom@tdavidow.com.

Mediation Ethics