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Advisory Board Concerns

The trend for the formation of Advisory Boards for larger private companies has been gaining momentum in Australia over the last few years.

An Advisory Board is a group of persons selected by the executive or Board of a company with the objective to provide assistance to the executive or Board. They are traditionally less formal in nature than a Board and given the structure and their mandates, they usually do not have authority to vote on corporate matters.

As the practice of forming an Advisory Board has become more established in Australia, we are being asked more regularly questions from Advisory Board members concerning whether they have Officers’ duties and liabilities.

In our view, the highest risk for an Advisory Board member is to be found to have fiduciary obligations/liabilities akin to a Director/Officer because they have been found to have been holding themselves out to be a de-facto Director. A de-facto Director is described in Australian law as a director, not validly appointed, but in whose direction the formally appointed directors are accustomed to act. (refer to the definition of Director in Section 9 of the Corporations Act 2001 (Cth)).

The level of fiduciary obligations owing is much higher for a Board of Directors than an Advisory Board member. If the Board of Directors drives the company in the wrong direction, they can become personally liable, whereas members of an Advisory Board are less likely to be personally liable. This is because members of an Advisory Board have no voting rights on resolutions, no power to remove the CEO or members of the management team and the CEO and executive is therefore not obliged to take the advice of the Advisory Board.

As an Advisory Board member, consider the following as a checklist of factors that could point towards being considered a de-facto Director:

• What level of involvement do you have in the internal practices of the company;
• Would people outside the company view you to be a Director;
• Are your duties those that one would have expected of a Director;
• Do you have the right to refuse or reject company requests with respect to remuneration or expenses
• Who has control over the company’s bank accounts;
• Have the formally appointed Directors resigned leaving you in control of the business; and
• Do you consider yourself as a Director.

Appointments to Advisory Boards can be professionally fulfilling and very beneficial to the company involved. Keeping a clear mind of the duties and responsibilities of Directors and how they differ from Advisory Board members is key to ensuring that an overstatement of the role does not leave you as an Advisory Board member in the position of an apparent or de-facto Director, and inheriting the higher obligations which come with that.