Advisory Board Advantages Raise Legal Issues

This excellent post by Ross Mayfield describes the benefits of an effective Board of Advisors (BoA), how to handle conflicts of interest and best practices for disclosure stating:

"I liken the role of a BoA as a group with strong ties to the company, playing a role in it's social network as the first degree. Initially, names alone provide credibility or thought leadership, but to really gain advantage, a structure such as above needs to ensure information flow and set expectations...Some of the benefits of a BoA:

Thought leadership
Technical advice
Strategic advice
Trusted feedback loop
Network into customers, partners and VCs
Increases the perception of scale and maturity
Properly disclosed influence through blogs and press
Cash-conservative compensation..."

Other good resources on advisory boards include this article by Auren Hoffman for Business Week and this post by Steven Bayle who points out, that when properly structured and managed, an advisory board can establish credibility in the marketplace and provide valuable assistance and advice on topics such as the company’s strategy, product offerings and technological direction.

As you might imagine, advisory boards raise legal issues. While the posts noted above touch on some of the legal issues involved in creating and serving on an advisory board, I would add the following, taken in part from this Tech Biz Florida article:

Advisory board members:

§ Do not have same statutory protections afforded to elected Boards of Directors
§ Do not vote as part of the Board of Directors.
§ Do do not have policy-making powers.
§ Are not officers or employees of the company.
§ Do not have management authority in the company.

If your company decides to establish an advisory board, it should do so in a way that minimizes any risk of liability for the advisory director. Steps that can be taken include:

§ A written description of the role and responsibility of advisory board members, which makes it clear that they have no policy-making powers, have no voting authority, and have no management authority in the company, but their role is solely advisory, subject to the review and approval of the company's Board of Directors and/or senior management.

§ Written records of the proceedings of advisory board meetings, which will reflect that the advisory board was acting consistent with the written description of its role in the company.

§ Review of the company's D&O Insurance policy to make certain that the advisory directors are sufficiently protected if a lawsuit is filed against them.

§ Review of the company's articles of incorporation and bylaws and local law to make certain that the company will be obligated to indemnify advisory directors to the full extent allowed by law, and consideration of separate indemnity agreements between the company and its advisory directors.