3.14 Advisory Committees

Advisory Committee: There is a role for an Advisory Committee. However, it is not to take the place of the Board.

Some companies appoint knowledgeable people to an Advisory Committee to gain the benefit of their expertise without exposing them to the liabilities and routine requirements of Directors. Typically, however, in tech start-ups, there is little bandwidth among management, while running the company and reporting to the Board, to properly prepare an Advisory Committee to delve into important issues. Communication tends to be one-on-one with Advisors without the benefit of discussions that can generate a better solution. While expert Advisors can often provide valuable input on specific issues, the Committee is usually not as effective as it could be.1

Importantly, with little investment in the company either monetarily or with liability and reputation at stake, there is little incentive for the Advisors to participate meaningfully. An Advisory Committee does not owe a duty of care to the company or the shareholders, and does not have the mandate to oversee management and hold it to account. Consequently, it cannot perform the functions of the Board.

When companies promote their Advisory Committee as a surrogate for a Board, investors and other stakeholders are not impressed.

See related topics Requirements for Directors.

Professional Advisors: It is becoming common for CEOs of early stage tech companies to hire professional advisors to provide the mentoring and advice typically provided by the Board. Indeed, there are programs fostered by angels and early investors to promote the engagement of advisors in lieu of the Board. The belief is that Boards are cumbersome and ineffective. CEOs can more efficiently gain the help they need with an advisor hired and responsible only to him, without ceding control and copious amounts of time to such a Board.

CEOs should obtain assistance and advice in a manner that is most effective for them, of course. However, the formal process of reporting up to a Board and being held accountable for decisions and actions is a discipline that cannot be replaced by and advisor beholden to the CEO.

An advisor if helpful, but a Board for certain.

1 In biotechnology and medical device companies, the scientific and/or medical advisory committee is typically better organized and serves a meaningful purpose.