Role and Importance of Legal Advisory Board
India is witnessing the paradigm shift in the way businesses are run in the country. It doesn’t matter whether you are a startup, MSME, or Large enterprise, everyone gearing up for the world stage. The government is making efforts to make “Ease of Doing Business” simpler by reducing compliance and making government machinery robust, by enacting more effective and robust laws. Similarly, corporates are streamlining their business to increase efficiency and net profits. However, no great business or effective government machinery can be built or run alone. It is high-quality advice from experts from various domains of a company’s operations that enhances an organization’s odds of success. This advice can either be given by Boards of Directors, Consultants other networks. Interestingly current trends show, more attention is given to advisory boards.
Why have an advisory board?
It is important to answer one fundamental question by enterprise before setting up any Advisory Board. “Why are we establishing an advisory board and what do we want out of it?” The enterprise may be seeking assistance with anything from marketing to managing human resources to legal compliances and issues. Defining advisory boards’ purpose will help in structuring it for maximizing its contribution to the enterprise’s success.
The entrepreneurs can benefit from the introduction of an advisory board with having advice from industry experts, still, entrepreneurs are reluctant to cede their authority to outside groups of directors. In the case of multinational companies, there is a particular variation. In foreign jurisdictions, MNCs are not comfortable with advisory boards to cede any significant authority advisory board, even though local advisory can help in addressing the realities of operating in that particular location.
An advisory board may serve for a board of directors as a feeder group. This works well if it consists of people, among other things, whose chemistry is good and who have the skills appropriate to the business needs. However, the development of an effective board is a long-term project.
In certain cases, the smaller advisory board can be more efficient than the larger board. While the optimum size of a management board varies, and while different sizes match different companies at different stages in their lives, all companies face constraints of size.
Advisory Boards provide consistency, longevity, and background knowledge, which can enable members of Advisory Boards to have sufficient knowledge and interest to give reliable advice in specific matters. A position of the Advisory Board and compensation for the position (or otherwise), contribute to ensuring that a request for assistance is considered seriously and that careful advice is provided.
Advisory boards provide safe harbors for executives who may be able to test-drive options before they are forced to be more definitive and assertive before a board of directors, which assesses the CEO and establishes his or her compensation. A CEO may feel more comfortable expressing partially defined or tentative views before a group whose sole purpose is to provide advice. For the same reason, an advisory board may also serve as an instrument of change, both as a sounding board for senior executives and as a body that can inspire change in cases in which comparable suggestions from the board of directors might suggest a lack of confidence in the senior management team.
An advisory board is created solely to deal with this issue without expressing an interest in or giving due consideration to other aspects of the business (which also must be taken into consideration by a board of directors). In contrast to participating in much of the ritual that accompanies the proceedings of the board of directors (minutes, formal approvals, ratifications, etc.), the Advisory Board can focus directly and solely on the issue for which it was established.
An advisory Board can contribute to alleviating customer/competitor issues for a Board. Sensitivities are involved in the entirety of your business, if that committee includes clients, before a board of directors. The problem may arise in the context of the customer vs. your company, but it can also arise among the client if they are on the board.
It may be less time consuming to deal with advisory boards than with boards of directors. Later meetings are usually held at least four times a year, more often; board meetings take time. An advisory board meets just once or twice a year. The meetings of the Advisory Board may also be shorter since its range of problems is smaller than that of the Board.
However, the company can benefit greatly from considering the kind of investment which must be undertaken in terms of time, organization, and cost if it is to obtain the desired benefit from the Advisory Board.
Fiduciary duty/liability issues
Fiduciary duties and other liability concerns are addressed by advisory boards. Directors are exposed to a range of statutory obligations (responsibility for unpaid wages, unpaid taxes, damage to the environment, etc.) as well as to trusts and other obligations, which can lead to civil or legal liability. It is highly unlikely that a member of the advisory board might undergo such duties.
Corporate directors only have statutory responsibilities. Consequently, qualified persons who are not prepared to assume the responsibility of the director might be encouraged to help enterprises as members of the advisory board.
A distinctive and diversified case involving advisory boards that operate around limited partnerships can represent a serious risk. In these cases, however, the practice of how advisory boards function well is developed, and thus the risk is avoided.
Creating and operating advisory boards
It is essential to understand who wants to achieve what from the advisory board to achieve the desired benefits. A second issue is how the Board ‘s activities should be performed. It is necessary to address the following problems.
The Company and the advisory Board must understand what the advisory Board and individual members are looking for. This starts with determining who should be advised. The Board may well serve as (for example) adviser to the (CEO or chairman), a subsidiary or a chairman of the Division, other senior directors, or a board of directors or it may function as a marketing, product development, sales techniques or another business-related focus group. The type of persons in the advisory board and the way they need to be equipped and committed to their duties should determine the nature of that which is being sought.
The ultimate supervisory responsibility for every business of the company lies with the board of directors. An advisory committee can focus so broadly or narrowly on a particular feature of a particular product. The focus of the committee is important to determine.
The company considered an advisory board with legal, software, mathematics, and financial engineering skills. It also found that risk managers’ interests might be sufficiently different from those of others that the kind of interaction hoped for in the consultative board would not materialize.
An advisory board must be of the right size. The advisory board, like the board of directors’, must be established with care taking account of the current and future needs of the company and the chemistry of the members of the board and of others with whom advisory board members work. As mentioned below, considerable care and feeding are needed to be effective for members of the Advisory Board. A committee with more than the appropriate number of members will be challenged to provide ongoing information needed to allow the committee to be effective and to organize board meetings.
It is often best to start with the leader of the Advisory Board and to make the Board grow from a rather small size to its final number. This can be achieved over time as the advisory board develops skills and experience. Group dynamics show a maximum of eight or more (taking into account the need for corporate and other facilitators during meetings) except if the mandate of the advisory board requires a more substantial representation (for example, in a special and large number of constituencies with the establishment of an advisory committee).
Meeting organization and frequency
Members of the advisory board are sought for their characteristics. Those attributes are usually very popular for others, and they are busy people in most cases. If an advisory board is to be set up through meetings (instead of one-on-one consultation with the CEO, for example), meetings need to be scheduled well beforehand. To ensure that meeting dates are always known for the next 12- (or 18-) months, It is recommended to establish a scheduled meeting on a rotating 12-(or even 18-) month basis. Emergencies may arise, but a meeting date may be established well in advance, reducing the risk of conflict.
Term of Membership
It may be useful for members to be appointed for a particular term (one, two or three years), so that they can be active, rather than withdrawing their membership for the future. This issue may be especially important if an advisory board is initially established (if the costs and benefits of the board have not yet been established) or if expansions are envisaged beyond well-known members. In some cases it would be beneficial to convene a single advisory board meeting, to assess the value of the company before the advisory board or the public could be appointed to a more lasting structure.
It may be important, depending on the purpose of the advisory board, to focus on retaining the interests of the members of the Advisory Board, attracting members of the highest-profile, obtaining independent advice, addressing cost issues (or cash costs). No single formula is right for all advisory boards to compensate: each enterprise must take account of the sort of mechanisms of payments described above, its benefits, and its accompanying risks.
The commitment of Management/Leadership
An undertaking that wishes to have an effective consultative board shall devote time to determining its mandate, recruiting members, dealing with compensation issues, organizing effective meetings, making payments for the services of the members of the advisory board, and dealing with the other matters noted earlier. The commitment should come from a suitable point of view in the company. When an advisory board is primarily set up to inform the CEO, it must be clear and consistent that the CEO is involved.
When an advisory board is set up to provide support in science or marketing, it is necessary to identify a person who is willing to lend its name and time to recruit and to deal with the other problems. An advisory board which considers that no engagement exists (whether it involves poorly organized meetings, often canceled meetings, a leader canceling his last-minute participation, advice which is not passed on or ignored), will become ineffective quickly as members will not prepare, attend meetings or apply the level of rigor that requires.
So we come here in a full circle to start with the creation of an advisory board. Advisory boards can be helpful and compliant or time-consuming. Finally, you get what you’re creating, developing, and working with them.
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