Advisory boards can be useful means
of providing access to information on local conditions such as the social, legal, political and trading environments with which management may be unfamiliar.
At the same time they can also give company the chance to form helpful associations with respected, influential and compatible people who may not be interested in committing themselves – particularly for reasons of time or risk – to responsibility as director.
The usefulness of an advisory board depends on company’s circumstances. Certain banks and insurance companies are known to have established them.
Powers and liability
In establishing an advisory board, it’s important that its members not be exposed to liability as directors. For this reason it’s essential the company has absolute discretion to accept or disregard any recommendations made by the advisory board.
The advisory board should have no powers of veto, instruction, or direction, either actual or implied. Its role is to advise. This lets it exercise best judgement and offer advice in good faith, but without responsibility for the outcome.
Liability must remain with management and directors.
No fears
Whether it’s welcome or not, the advisory board should be able to offer collective opinion, while not suggesting it’s an instruction or direction.
In turn, the company shouldn’t have to justify to the advisory board decision that is contrary to this advice.
Similarities in structure may exist between the board of directors and the advisory board. They should both have chair to facilitate and lead, and have formal procedures in meetings.
Setting up
Advisory boards should be set up with clear agreement with the board of directors, detailing:
? composition
? mode and tenure of members
? means of appointing chair
? terms of reference; objectives, purpose and activities
? regularity of meetings
? role of committees
? relationship with directors and management
? areas excluded from its overview
? mechanism for reporting
? remuneration agreements
? directors’ and officers’ liability insurance
? procedures for dealing with conflict of
interest.
It should also be made clear that the advisory board has no delegated authorities, can’t pass resolutions on behalf of the company, doesn’t constitute sub-committee of the board of directors, or direct the CEO or company employees, and is independent of the company.
Conflicts of interest
As usual, members who are aware of conflict of interest should disclose it to this advisory board, plus the board of directors, and withdraw, abstain or ensure the advice is unbiased. Because members aren’t directors, this interest shouldn’t be entered in the company’s interest register.
The fact that advisory board members don’t make company decisions may enable more participation in matters on which directors could be obliged by propriety to withdraw.
Insiders
Advisory board members should observe strict confidentiality. Although independent of the company, they will be exposed to inside information and could become liable as ?insiders’ under the Securities Amendment Act 1988. They should be subject to the same restrictions as directors in dealing in company shares.
Directorial liability
While advisory boards can provide independent wisdom to companies with the purpose, among others, of insulating members from directorial liability the definition of ?director’ in the Companies Act 1993 (section 126) encompasses wide range of activities without clear indication of the policy objectives behind it. It is therefore difficult to be certain when the Courts will find an advisory board’s activities to have crossed the boundary although it is thought that they will be reluctant to attribute director status to members lightly.
Ultimately this depends on the activities of the advisory board. If advice is presented as direction or instruction, then members may fall into the ?director’ category.
Other liability
In addition to potential directorial liability it’s possible that members of paid advisory board could become liable for advice under the laws that make professionals responsible for their actions.
Professionally qualified members of an advisory board may not be the only members at risk.
This risk can be reduced by appropriate disclaimers, waivers, exclusions, and indemnity arrangements.
Prudent advisory board members might well consider taking out appropriate indemnity insurance to cover the risk.
Discretionary matters
Monitoring the performance of CEOs.
Although advisory boards have been known to monitor, on behalf of overseas corporations, the performance of chief executive officers of local NZ subsidiaries or branches, the better practice is to leave such matters to the board of directors.
Should directors and management be members?
To preserve the independence of company’s advisory board it’s good practice that company directors and management not be members of the advisory board.
Members should however expect to be given by management, on continuing basis, the necessary information to perform their business in accordance with the terms of their appointment.
Nature of the appointment
To help maintain the independence of advisory board members, it’s recommended that they be contracted as consultants rather than employees, of the company.
Peter Webb is director research and policy with the Institute of Directors in New Zealand (Inc).
