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Boards of Directors versus Advisory Boards
Del Mar, California USA - Boards of Directors versus Advisory Boards
By: Arthur Lipper
The functions of Directors and Advisors are both different and poorly understood.
The role of Directors is to represent the owners of a business in protecting and enhancing their interests in the business.
A Board of Directors should not attempt to manage a company, except through the selection and supervision of executive managers.
The Board should establish; the company’s mission, policies consistent with the mission and strategic objectives necessary to achieve the mission.
Therefore, an important function of Directors is to continually measure the performance of managers, making executive changes when necessary. Only that which can be measured can be improved and in all enterprises there is an ever-present need for improvement.
Directors also have a responsibility to protect the owners from managers when there is a conflict in economic objectives.
These oversight aspects of a Director’s decision making responsibilities are complicated by managers serving as members of Board of Directors and even more so by managers being influential in the selection of Directors. Therefore, the use of nominating committees, exclusively comprised of independent Directors, seems reasonable.
The function of advisors, be they serving individually or on a Board of Advisors, is to assist managers in achieving the objectives of the managers, as consistent with the mandates of the Board of Directors.
Although there are obvious possible conflicts it is reasonable for some Directors to also serve as Advisors.
Therefore, appropriate measures of executive performance should be established by Boards of Directors. There should also be a continuing awareness of the compensation norms for comparable companies operating in similar locations.
There should also be developed and utilized performance measurement of Directors with all of the company’s owners advised of the results. Company owners would be well served if the annual compensation of Directors be almost exclusively in options to purchase shares of the company at prices relating to the market value of the company at the time of grant.
Author/Correspondent's Profile: Arthur Lipper III, Chairman, British Far East Holdings Ltd.