Advisory Board (Observer Directors) – Definition

Cite this article as:"Advisory Board (Observer Directors) – Definition," in The Business Professor, updated March 26, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/advisory-board-observer-directors-definition/.

Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

Observer (Advisory Board) Directors Definition

Large corporations seek the services of field experts, former board members, or successful investors, venture capitalists, and entrepreneurs to observe and advise on business decisions by the board, as Board Advisors or Board Observers. This is helpful to the corporates who benefit from the experience and network of the Observer/Adviser, while the Directors get insight into the workings of corporations and build on their repertoire. The two designations ‘Board Observer’ and ‘Board Advisor’ are distinct from each other.

A Little More on What is an Advisory Board

Board Observers are usually representative members of the investors or venture capital firms, who can influence board decisions in their capacity as investors but do not have any voting power or fiduciary duties. They are acting in the best interests of their parent firms – the investing bodies, rather than the best interests of the shareholders and hence are regarded with circumspection by the Board of Directors in most meetings they observe. They can’t sit in on all Board meetings, might need to step out when information they aren’t privy to is being discussed.

Board Advisors on the other hand are appointed by the company or Board of Directors for their expertise. They have no vested interests in the revenue generating aspect of the company, nor have any investments to protect. Similar to Board Observers, Board Advisors also do not have any voting or veto power, nor any fiduciary duties. They’re present in Board Meetings as Consultants to offer their experience and expertise.

Both Board Advisors and Observers have a contractual agreement however to protect the interests of both parties. NDAs and other documents are also in place, in case of legal ramifications like liabilities incurred by the company.

Board Observers usually hold a minor stake in the company. Investors might sometimes request a seat as Observers for their partners or associates. Even though Board Observers do not have any fiduciary duties and are protected from liabilities, the role comes with its own downsides. Read on to learn about the potential pros and cons of serving as a Board Observer.

The Disadvantages of Being A Board Observer

Board Observers exert great soft power and can influence the direction and strategic operations of a business. Too many Board Observers can exert influence in different directions with different motives creating a culture of factions, indecisiveness, goals at odds with one another, resulting in incohesive policies and arrested growth. Meetings with unending discussions, safeguarding information during volatile meetings, and protecting the interests of the company and shareholders could be more exhausting and difficult than it appears. The presence of a Board Observer can be detracting to the Board.

The Advantages of Being A Board Observer

The perks of having a front row view to the workings of a corporate machine without bearing any responsibility for losses and liabilities are immense. Capitalizing on your knowledge and experience, tapping into and growing your business associates network is another advantage of being a Board Observer. Getting the pick of investment opportunities is no small matter either. It also involves much less legal and actual work unlike being on the board and contributing to the day to day affairs of running a business.

How Does One Become A Board Observer?

There’s no set criteria for joining a corporate board as an Observer. While some companies require investors to own at least 10% of the company’s shares, others cap it at 1%. Intellectual property rights safeguards and other similar concerns discourage a lot of corporates from hiring outsiders to sit in on board meetings. One needs to bring an immense wealth of experience, resources – either financial or social, to be invited to join a company board without fiduciary responsibilities. While getting a foot in is hard, staying on in the capacity of an Observer might be even more so as some startups require investors to keep investing at a prorata basis to enjoy Board Observer privileges. There’s no institutionalized method of hiring to become a board member.

References for Observer (Advisory) Directors

Academid Research on Advisory Board

Mutual fund advisory fees: The cost of conflicts of interest, Freeman, J. P., & Brown, S. L. (2000). J. Corp. L., 26, 609. This paper examines the costs associated with Advisory members fee in the mutual funds market and the price fluctuation as a result of conflicts of interest.

Mutual Funds: Solving the Shortcomings of the Independent Director Response to Advisory Self-Dealing Through Use of the Undue Influence Standard, Kim, S. S. (1998). Columbia Law Review, 474-509. This paper examines the role of Independent Directors and Advisory Boards on the mutual funds market, their influence, and SEC involvement to bring down the overheads.

Leadership styles of Florida’s county extension directors: Perceptions of self and others, Rudd, R. D. (2000). In 27th Annual National Agricultural Research Conference, San Francisco, CA. This paper studies the strengths and weaknesses of the leadership practices in Florida county, and looks for the gender imbalance in County Extension Directors leadership.

Corporate governance in the small firm: Prescriptions for CEOs and directors, Daily, C. M., & Dalton, D. R. (1994). Journal of Small Business Strategy, 5(1), 57-68. This paper takes a look at the leadership practices of small corporate firms.

Internal governance in the nonprofit boardroom: A participant observer study, Parker, L. D. (2007). Corporate Governance: An International Review, 15(5), 923-934. This is a study of the internal governance of non-profit boardrooms, observations and insight are presented and discussed.

Special Operating Agencies: Management Advisory Boards, Newcombe, E. J. (1996). Canadian Center for Management Development.

Applied corporate governance: Corporate advisory boards-pros and cons, Walker, R. (2012). Keeping Good Companies, 64(3), 139. This paper studies the pros and cons of Advisory Boards in the corporate world.

The Management of Advisory Committees: An Assignment for the’70’s, Brown, D. S. (1972). Public Administration Review, 32(4), 334-342.

Transforming the corporate training function through developing a training strategy and advisory board: A longitudinal case study, Kalman, H. K. (2008). Performance Improvement Quarterly, 20(34), 75-95. This is a longitudinal study that aims to transform corporate training functions and improve performance via various measures including the appointment of an Advisory Board.

Corporate Governance, Shariah Advisory Boards and Islamic Banks’ Performance, Hassan, M., Rizwan, M., & Sohail, H. M. (2017). Pakistan Journal of Islamic Research, 18(1). This paper looks at the performance of the corporate governance in Islamic Banks and the influence of the Shariah Advisory Boards.

Was this article helpful?