Sunday, October 24, 2010

Advisory Boards for Indian Companies

About a week ago the Economic Times’ Corporate Dossier carried two columns (here and here) highlighting the growing popularity of advisory boards in Indian companies. The individuals on such boards perform advisory functions and almost no monitoring functions. In that sense, an advisory board is distinct from the statutorily required board of directors of a company. As one column notes:

Fiduciary boards are mandated as per statute. They are created at the company level and at times their formal nature & structure can prohibit an effective leverage of their capability. Advisory boards, on the other hand, are their non-fiduciary, informal and non binding. They can be set up for a CEO or promoter rather than for the company. They are inherently flexible and can have a narrowly focussed objective to a wider governance role.

Having access to a high quality advisory can enhance an company’s odds of success. An advisory board can serve as a feeder group for board directors. Development of a board of directors is a long term project and by observing the commitment and contribution of some of the advisory board members they can be appointed to the board of directors.

Advisory board formation and its objectives vary across diverse contexts. Multinational corporations (MNCs), for example, are reluctant to give meaningful authority to a fiduciary board of their local subsidiary.
The other column goes on to discuss the viability of the concept:

But why form an additional board when all registered companies already have a statutory board of directors mandated by law? The raison d'être for advisory boards is different for different sets of companies. For conglomerates, there's a need for a set of senior leaders with relevant expertise who can look at opportunities and issues at the group level. The various company level boards within a conglomerate provide strategic input and compliance for a particular company, but at the group level a different kind of strategic insight is needed.


But like any management practice, advisory boards have its fair share of critics too. The toothless nature of the board is what critics point out as its biggest drawback. And the ills of the statutory boardrooms, like 'Groupthink' and the 'golf buddies syndrome' affect advisory boards too. Companies are known to constitute advisory boards to get access and credibility.

For the companies wanting to constitute advisory boards, getting candidates can be tricky. Some experienced members are not comfortable with providing just advice - they'd rather have some level of control that being a statutory board member provides. For some, an advisory role suits just fine because it doesn't come with liabilities listed companies throw up.
Advisory boards are non-statutory and hence the acts of their members are unlikely to carry legal consequences. However, in certain limited circumstances, the Companies Act imposes duties and liabilities on a person “in accordance with whose directions or instructions” the board of directors of a company is accustomed to act. Such person is otherwise referred to as a “shadow director”, and is generally subject to all the duties and liabilities of any other director.

So long as the advice from the advisory board is not binding on the statutory board of directors and that the statutory board is not accustomed to following their advice, the advisors will not be treated as shadow directors. This position is somewhat reinforced by section 7 of the Companies Act, which provides: “Except where this Act expressly provides otherwise, a person shall not be deemed to be, within the meaning of any provision in this Act, a person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, by reason only that the Board acts on advice given by him in a professional capacity.” Complete reliance on this section may, however, require demonstration that the advice was provided in a professional capacity.

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