FAQ: Why Are Advisory Boards Important?

By Indeed Editorial Team

Published November 30, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many companies make big decisions by combining the opinions of company executives, the input of the board of directors and the advice of contracted experts. An advisory board can be an excellent addition to this decision-making process. These entities exist specifically to lend attention and insight to company decisions and challenges. In this article, we define advisory boards, discuss advisory board importance, explain when a business may need an advisory board and describe how to select an advisory board effectively.

Related: Decision-Makers: Definition and Why They're Important

What are advisory boards?

An advisory board is a business entity made up of experts who provide advice to the company executives or the board of directors. The individuals who sit on the advisory board are not investors, have no other avenue of influence and hold no other formal position within the company. This allows them to give unbiased advice to benefit the company overall. They may meet regularly with the chief executive officer (CEO) or other key officials to discuss the progress of the organization. Specifically, they may:

  • Advise on company goals and trajectory

  • Advise on expansion

  • Advise on internal operations

  • Advise on political standing

  • Make connections and introductions on the company's behalf

Ad advisory board is different from a company board of directors. The latter is a governing body which represents the company shareholders and holds legal, financial and decision based responsibilities within the company. An advisory board is responsible only for the advice that it provides, and is not responsible for the company in any legal manner. A board of directors is also a requirement for public companies, whereas an advisory board is a purely optional institutional choice.

Read more: Differences Between Board of Directors vs. Board of Advisers

Why are advisory boards important?

Companies of all sizes may benefit from an advisory board. Here are a few important things that an advisory board may provide:

Credibility

The existence of an advisory board can help boost a company's credibility. Investors, media officials or the public know that the purpose of an advisory board is to provide objective advice to help the company function to the best of its ability. This means that they may see the inclusion of such a board as evidence of a company's commitment to its mission, or proof of its investment in long-term stability.

A company may also boost its credibility by including well known and well-respected individuals on its board. The presence of a public figure that the community knows and trusts may help assure them that the advice that the company uses to operate is trustworthy. By extension, this may also help assure them that the company itself is trustworthy. This is an essential viewpoint for investors or customers, and may encourage them to put their time and money into the company.

Related: Company Reputation: What It Is and How To Improve It

Perspective

Advisory board members are not as financially or legally invested in the company as executives, investors or other organizational personnel. This means that they may be able to provide advice that is free of emotional influence. Executives and other individuals who have been with the company for a long time may also benefit from opinions that are new and fresh. This can help them see things about the company from a new point of view, after having looked at it the same way for a significant amount of time.

The fact that they're not responsible for the company in the same way as company executives or a member of the board of directors also means that an advisory board member may be more likely to think creatively or consider high-risk, high-reward options. This type of perspective may also be helpful for company executives to break them out of their normal patterns of thought.

Alternative expertise

Advisory boards are generally made up of individuals who are experts in a variety of fields other. In this way, they may fill knowledge gaps and help contribute to a diverse set of opinions and experiences. This may make the overall advice more sound and dependable. It also means that if the company needs knowledge or professional contacts in an area beyond the expertise of their internal personnel, there may be an advisory board member who can provide what they need.

Related: How To Create an Advisory Board

When would a business need an advisory board?

New companies like start-ups may benefit most significantly from a board of advisors. This may be particularly true if a relatively young or inexperienced CEO is behind the company. In these cases, a board of advisors may provide the stability and experience that keeps the start-up functional during its first, often turbulent, year of business. Similarly, businesses going through a change in leadership or another major shift, like an acquisition or merger, may benefit from the presence of an advisory board for additional support during challenging times.

Additionally, a board of directors may prove beneficial for businesses that are operating well, but hoping to expand. CEOs in this situation may choose to create an advisory board with the specifics of their expansion in mind. This can help them select individuals with expertise that may help them achieve their expansion goals. For instance, if a company is hoping to expand internationally, they may specifically look for advisory board members with experience in international law, trading or business. If a company is hoping to broaden their internet based sales, they may choose individuals with ecommerce or technical experience.

How do you select an advisory board effectively?

When selecting members for your advisory board, it may be useful to include individuals from a variety of business and other professional backgrounds. Here are some specific tips to keep in mind:

  • Include experts. Consider inviting individuals who have distinguished themselves as experts in their respective fields. This can help establish the quality of their connections and their advice.

  • Include individuals with business experience. Businesses go through a wide variety of challenges. Including some advisory board members with business experience can help ensure sage business advice from someone who may have experienced the same challenges before.

  • Fill company knowledge gaps. An advisory board is a wonderful opportunity to add individuals to the company team who have skills or knowledge that the company did not have access to before. Company executives may think about what knowledge gaps exist in their organization and take these into account when creating an advisory board.

  • Keep company goals in mind. It may be useful to include individuals based on their ability to help you achieve your goals. For example, if you know you plan to expand into a new geographical area, it may be useful to include an individual from that area on your advisory board.

  • Look for enthusiasm. Individuals who are excited about the company, its mission or the opportunity to offer advice may spend more time and energy on their advisory role. This makes enthusiasm an important qualifying factor for advisory board members.

  • Look for honesty. Sometimes, the best advice is not necessarily in line with what the company executives hope to hear. Regardless, it's important for them to receive this advice, so including honest advisory board members can be highly valuable.

  • Consider diversity. Including individuals from different backgrounds can be a great way to increase the amount of perspective that your advisory board has. You may consider gender, race, socio-economic background, geographical location and other demographic factors, and work to create a board that represents a variety of different voices and opinions.

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