If you’re an entrepreneur, you’ve probably been told that your company needs a good board. You may have overheard other entrepreneurs speak — perhaps boastfully, perhaps resentfully — about their powerful or active (or activist) boards.
But what kind of thing is this board of which everyone speaks? It is probably one of two things: a Board of Directors or a Board of Advisors. And they are two very different things.
The Board of Directors oversees the CEO and sets the company’s overall direction; its members are elected by an annual vote of the company’s stockholders.
The Board of Advisors gives the CEO non-binding advice, sometimes in exchange for a tiny grant of stock; its members are chosen by the CEO for their knowledge of the company’s business and to enhance the company’s credibility.
The Board of Directors — The CEO’s Boss
The Board of Directors is probably the most powerful entity in your company. Every corporation (but not every LLC) has a Board of Directors, and it typically enjoys the power to set the strategic direction of the company, hire and fire its officers, and make all the major decisions that could affect the value of the company and its ability to achieve its goals, such as whether or not to enter into mergers and acquisitions (as the buyer or the seller) and whether or not to take on investment capital from outsiders.
A corporation’s CEO answers to, and serves at the pleasure of, the Board of Directors. It’s the CEO’s boss. The Board of Directors is elected by the shareholders of the corporation at their yearly meeting. When investors put a lot of money in a company, they get shares of stock in return, and, consequently, the right to participate in voting for the election of Directors. In many cases, this is the only thing shareholders ever vote on. Boards of Directors represent the shareholders’ interests, and may only be removed by a vote of the shareholders.
The Board of Advisors — The CEO’s Wise Counsel
The Board of Advisors has no power to control the company in any way. It is merely an advisory body that is convened at the CEO’s request to help guide the company and critique its plans. In many cases, Advisors are chosen for their expertise in the company’s field, or their clout in the industry. They are sometimes chosen because in their day jobs they hold positions of power in other companies that could turn out to be valuable strategic partners or acquirers.
A company’s Board of Advisors is populated at the behest of the CEO, and each person who agrees to sit on the Board of Advisors is typically granted a small amount of stock in the company for their trouble. In theory, the CEO can engage or dismiss members of the Board of Advisors at any time.
So, kids, when speaking of your board, remember to indicate whether you’re talking about your Board of Directors or your Board of Advisors. One is your supervisor, the other is your sensei.