A nonprofit corporation is required to have a board of directors. States can vary among respective requirements of a board of directors but the general idea is the same: there must be a board of directors that serves as the ultimate governing body of the corporation. In addition to being legally responsible for the overall management of the corporation, a director is legally required to perform his or her responsibilities subject to the fiduciary duties of care, loyalty, and obedience to the nonprofit corporation. (See, e.g., California Corporations Code Section 5231 which states duties must be performed “in a manner that the director believes to be in the best interest of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”).
Sometimes, a board of directors will elect to set up an “advisory board.” To an outsider, this advisory board may look very similar to the board of directors in some respects – for example, some advisory boards attend all board meetings, participate in discussions on important matters of the board of directors, and are composed of important stakeholders such as past directors and valuable donors. Although this group of individuals may be referred to as an advisory board, this “board” is not synonymous with the type of “board” that constitutes the board of directors. It is actually a committee created by the board of directors for advisory (or honorific) purposes but given a title that includes the word “board.” Accordingly, an advisory board is not the legal governing body of the organization and does not carry the same legal responsibilities and fiduciary duties as the board of directors. Additionally, in most cases, an advisory board tends to be a non-board committee, which means that it cannot act with the authority of the board of directors and may not be relied upon to the same extent as a board committee.
While an advisory board can provide valuable assistance to an organization and its board of directors, a problem occurs when the line between the two groups becomes blurred in practice. Understanding the difference between an advisory board and board of directors is important for ensuring proper oversight of the organization and for directors in satisfying their fiduciary duties. Below we’ve outlined common missteps and potentially important considerations for an organization using or contemplating the use of an advisory board.
Common Missteps
A director on the board of directors has the right to vote as a member of the governing body. (See California Corporations Code Section 5047). A member of an advisory board does not have such right. While members of an advisory group may be entitled to vote on decisions within the advisory board, an advisory board does not have legal authority to govern the organization, and, like other committees, any tasks or powers of the advisory board are delegated by the board of directors and ultimately subject to the direction and control of the board of directors.
Additionally, valid actions of the board of directors at a meeting require a quorum and sufficient vote of the directors. If an organization is confused about who counts for quorum and voting purposes, it could cause a series of past board actions to unravel or be cast into suspicion. Should someone challenge the validity of a board action, an organization may need to reach back many months, if not years, to determine whether important matters such as amendments to Bylaws or Articles and elections of the current directors were valid.
The confusion between the advisory board and board of directors can arise from situations such as commonly referring to both groups as “the board,” or when the advisory board starts to act like the board of directors due to a lack of clarification or understanding about roles (or vice versa). This confusion is sometimes compounded by the fact that the organization lacks any documented explanation about the role of the “advisory board” whether through a board resolution or its bylaws. There are many reasons that both individuals on an advisory board and those on the board of directors should want written clarification about the advisory board’s role.
First, such clarification is important for those on the advisory board in reducing personal liability risks and not undermining a defense that they were not part of the board of directors in a lawsuit. For example, California Corporations Code Section 5047 states, in part:
Except where otherwise expressly provided, ‘directors’ means natural persons, designated in the articles or bylaws or elected by the incorporators, and their successors and natural persons designated, elected or appointed by any other name or title to act as members of the governing body of the corporation. A person who does not have authority to act as a member of the governing body of the corporation, including through voting rights as a member of the governing body, is not a director as that term is used in this division regardless of title. (Emphasis added).
Because title alone is not determinative of who is on a board of directors and might instead be determined in part on the actions of such individual, unclear bylaws can be an invitation for debate about whether individuals claiming to serve only advisory roles are actually members of the board of the directors and can be held liable as directors.
Incorrect assumptions about who is a director can also expose the board of directors to liability risks. For example, the confidentiality attached to sensitive matters discussed among the directors can be destroyed if that information is shared with non-board members such as individuals on an advisory board. Additionally, depending on the circumstances, a failure by the directors to clarify whether such individual is in fact a director can call into question whether the directors have met their fiduciary duties.
Second, beyond liability concerns, an advisory board will be most useful to the organization and its board of directors if it understands what purpose it is intended to serve and how it is supposed to help. Written clarification through a board resolution or otherwise is also useful for the board of directors in holding an advisory board accountable and recruiting individuals who are at least aware of the commitment they will be making prior to joining the advisory board.
Third, it easier for both parties to avoid inadvertent confusion when there is something tangible to refer to rather than relying on word of mouth or informal practices. Ideally, if the organization has an advisory board or is likely to have one, it should be written into the bylaws – not because this language is required to authorize such an advisory board to exist but because it provides clarification to everyone about what’s going on. Furthermore, whatever the organization decides to call this advisory committee, everyone in the organization should stick with that language as much as possible not only in documentation such as meeting minutes but also in everyday verbal communications to avoid future confusion.
Other considerations
In her article, “What is an Advisory Board and Should We Have One?,” Jan Masaoka highlights four common reasons for creating an advisory board: fund raising, programmatic input, prestige, and fiscal sponsorship. There can be a wide array of reasons beyond these four and accordingly, looking at the purpose for the advisory board can raise a variation of additional considerations. For example, if the organization is seeking fund raising prestige, it may not want or expect much interaction with the advisory board with respect to meetings of the board of directors or participating in non-fund raising discussions. Alternatively, if it is foreseeable that members of an advisory board will someday become part of the governing board, there is likely a greater importance in having procedures in place to groom potential candidates for a director position during their service in only an advisory capacity. Depending on the purpose of the advisory board, other considerations may include:
Determining whether or when to allow advisory board members, if any, to be involved in executive sessions is a precautionary step to address prior to an executive session given that these sessions are often used to discuss sensitive matters outside of the presence of the staff and other non-director individuals. It may be helpful for directors to discuss questions such as:
Although advisory board members are legally different from members on the board of directors, one similarity they share is likely being perceived as walking billboards of the organizations to the public. Advisory boards are viewed as ambassadors of the organization and their involvement may be widely known, for example, through publication on the organization’s website or letterhead, or through their individual communications with others about their role on the organization’s advisory board. Especially for advisory boards that are intended to garner attention and prestige, an organization may want to consider message training or other activities to keep the advisory board engaged, knowledgeable, and good advocates of the organization. Consider strategies for addressing issues such as:
Testing the Waters/Training Ground
Advisory boards are often subject to less rules and procedures commonly attached to a board of directors such as terms, term limits, nominations and election procedures, and removal processes. This can be expected when there is a purposeful intention to create a less formal structure and less demanding commitment, such as an advisory board intended for outgoing directors or individuals who are seeking less time commitment to the organization or for an organization that has no plans for the individuals beyond the advisory board. However, in some situations, involvement in an advisory board may be the precursor to someday joining the board of directors. For example, organizations may want the advisory board to serve as (1) an opportunity for individuals to test the waters of their fit with the organization, availability, and other commitment factors; and (2) a training ground for finding and grooming potential directors. The board of directors should consider what types of additional procedures may be appropriate through questions such as:
