A closely-held corporation can benefit from having an outside director with special expertise (e.g., strategy, marketing, HR, technology, finance and international business). However, potential outside directors are often reluctant to take on the role of a director of a closely-held corporation because of fiduciary obligations and other potential liabilities (e.g., environmental, employment discrimination, unpaid wages, unpaid taxes and regulatory liability).
A corporation can derive many of the benefits of an outside director, while avoiding many of the problems, by appointing an advisory board. An entrepreneur with a closely-held business may also be reluctant to dilute authority with outside directors, but may be comfortable with an advisory board which renders advice but has management authority or responsibility.
An advisory board can address particular issues only without the need to monitor all aspects of the business which a corporate board of directors must do. An advisory director can bring expertise, contacts and relevant skills that may not be otherwise readily available to the corporation. Also, the compensation of advisory directors will generally be less than that required for corporate directors and that would be required by consultants with comparable skills and who may not have the personal commitment of advisory directors.
In appointing advisory directors, the following matters should be addressed:
Focus: The aspects of the business on which the advisory directors are to focus.
Compensation: Compensation which may be in the form of cash and stock, or a combination thereof, and which can be fixed or variable based on time commitment.
Time Commitment: The time commitment which can be fixed or variable.
Term: The term of the appointment. Because it is always more difficult to terminate an advisory director than to appoint one, the appointment should be for a fixed term (e.g., one, two or three years) which may or may not be renewed.
Confidentiality: Unlike a corporate director, an advisory director is not subject to a duty of confidentiality. Accordingly, confidentiality obligations should be contractually addressed.
Indemnification: Without a specific agreement, advisory directors are not entitled to be indemnified by the corporation for claims against them as a result of serving as an advisory director and may be unwilling to serve for that reason. Accordingly, contractual indemnification provisions and coverage under applicable directors and officers liability insurance should be considered.
Advisory boards can allow a closely-held corporation to obtain the expertise of persons who would be reluctant to become corporate directors because of liability concerns. The steps involved in setting up an advisory board are adoption of a board resolution authorizing the advisory board and preparation of an advisory board member agreement setting forth the respective rights and obligations of the corporation and the advisory director. In some instances, it may be appropriate for the board of directors to adopt a charter for the advisory board.