Juan José Cervantes
Managing Partner
Trebol Capital
/
Startup Contributor

Do You Have a Board of Directors or a Board of Advisors?

By Juan José Cervantes Mena | Thu, 08/26/2021 - 09:08

Usually, investors looking to get more involved with their investment ask for a place on the board of the company while, on the other hand, a proactive CEO and management team seek outside expertise to help the company grow and prosper. However, there are two types of board that these companies can have: the advisory board and the board of directors; and the conformation and formality given by both the founders and the investors is what will determine whether the company has one or the other.

Traditionally, companies, and specifically startups, seeking external advice invite advisors or investors to join their board of directors, not knowing the formality, liability, and expenses of that, so consciously or unconsciously, what they have is an informal alternative: a board of advisors.

I have seen a lot of informality around the conformation of a board when usually the positions are granted by a close relationship with one of the shareholders or through networking, which shows a lack of expertise, independence in the boards and objectivity in the selection process.

I personally recommend being clear with the definitions and use a board of advisors for startup and small companies, and a board of directors for an established company with the capacity to face the consequences that this type of governance brings, such as legally defined responsibilities according to the corporation’s bylaws, compensation for the board members, insurance, or indemnification agreements. On one occasion, a startup invited a recognized professional to join their board of directors and he kindly declined once he saw the compensation offered in shares and when he knew there was not an indemnification agreement.

Frequently new investors ask to join the board of directors in an invested company for “control” or sometimes for the sake of reputation that this position grants, when they are unaware of the risk that implies, from the salary point of view up to the legal issues involved in being part of the council. I strongly recommend that founders or CEOs be careful to accept these conditions when accepting investments because an investor is not always a good board member.

An advisory board is relatively easy to create to meet the needs of the organization and less or no compensation is required to retain an adviser because as the entrepreneurial ecosystem evolves, more and more people want to get involved and help. It is common that some startups use the advisory board as part of their deck when fundraising and it helps to enhance an organization’s credibility.

When the company chooses a board member, it should pay attention to soft skills, understood as the combination of social competencies, communication, personality and common sense, and technical skills like knowledge of the specific industry, finance, technology, risk management, environmental, social and governance (ESG) practices. These skills should bring strengths and expertise to the management team regardless of the age or gender of who brings them to the table.

Finally, a recent survey of boards of directors in Latam companies showed a lack of knowledge about board meetings, from the legal perspective, technical and risk factors up to the same role to be played by members of the directorate, as well as the dynamics of the board, like how often meetings should be held, how it works and how members are chosen, including the chairman of the board. Obviously, there is still some work to do in educating all parties involved.

A board can help a company in terms of providing guidance, counsel and advice but, in the end, it depends on how you choose your board members because it seems like today, it has become more of a reputational issue and overrated.

Photo by:   Juan José Cervantes