Board of Advisors or Board of Directors?

I want to expand a little on a column I wrote some time ago about forming a board of directors for your small business. Let me preface my remarks by stating that I am not an attorney so the following remarks should not be taken as legal advice. You should always see an attorney for that.To quickly review, the idea of forming such a board was the best piece of business-related advice I ever got in my 55 years of owning or managing small businesses. Most small businesses tend to "go it alone" and only ask for advice and counsel when they get into some sort of serious trouble. Forming a board of directors of people who each "bring something to the table" prevents costly mistakes, provides guidance in unfamiliar territory, gives balanced and unbiased opinions and helps in making important business decisions.
Any business can form a board of advisors and all corporations must form a board of directors and elect a president, a secretary and a chief financial officer. The same person may hold any number of these offices. Most small, closely held corporations elect the husband as President, the wife as Chief Financial Officer and Rover, the family dog as the Secretary. (Yes, I’m being a little facetious.) These two or three people usually also serve as the board of directors. To me that is a big mistake. It is perfectly legal to have just a few close family members as officers of the company and essentially have them act as the governing board. But doing it that way loses the valuable advice and guidance that a "real" board will provide. It also exposes the owners to charges of operating a "shell" corporation.
Now the question is this. If your company is set up as a corporation, should you have a board of advisors or a board of directors which consists of just Mr and Mrs Owner? Most SCORE clients that I advise to form a board of directors hesitate because they are fearful of "losing control" of their company. They have heard numerous stories of CEO’s being fired by their boards and they don’t want that to happen to them. Do I need to fear losing control or being fired by my board? And additionally, why form a "real" board of directors (consisting of outside experts who can bring important experience and advice) when I can get the same advice from a board of advisors?
In a major corporation such as General Motors or IBM there are literally hundreds of thousands of stockholders. Collectively, these stockholders are the owners of the company. They elect the members of the board of directors whose major responsibility is to manage the affairs of the corporation (do you remember receiving a proxy vote in the mail every year?) and the board of directors elect (hire) the operating officers of the company – the CEO, the COO, the CFO, etc. whose job it is to run the company on a day-to-day basis. If at any time the board feels that any of the officers is not doing his/her job, they can vote to fire that person. So from time to time, you read in the paper that some board of directors fired their CEO.
This is what every small business owner remembers when I suggest his forming a board of directors. But in almost all cases of a small corporation, the owner/founder is the sole stockholder or owns the majority of the stock. That means that he is the one who elects (hires) the board of directors. Simply by having a meeting with himself (yes, I know it sounds dumb), he can dismiss his board as he pleases. Could his board meet and decide to fire him? Technically, yes. But then he in turn has the power to fire the entire board. Problem solved - because it wasn’t ever a problem to begin with. The point is that in a small, closely held corporation there is no practical reason to fear that the owner (read sole stockholder) can lose control of his company.
Now for the second question – why form a board of directors instead of a board of advisors? One of the reasons for forming a corporation is for the purpose of limited liability in the event of a lawsuit of some kind. This means that any judgement against the corporation stops at the assets of the corporation. No personal assets of the owners of the corporation will be at risk unless the litigant can "pierce the corporate veil" by claiming and proving that the corporation was not actually and legally operated as one. But having a "real" board of directors with regular meetings and minutes of actual board meetings will prevent that from happening. Walking into court with a stack of corporate record books will immediately refute any claims of operating a "shell" corporation and will protect its owner as intended.
Forming a board of directors or a board of advisors is your option. But do one or the other.

© 2008 by Paul Burri