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Establishing an Advisory Board: value, risks, and legal status
For growing SMEs that do not yet want or need a formal Supervisory Board, an Advisory Board is a popular governance instrument. It offers access to external expertise and a network without the statutory obligations associated with a Supervisory Board. However, the legal status of an Advisory Board is fundamentally different from that of a Supervisory Board, and those unfamiliar with the rules of the game risk unclear decision-making, liability disputes, and friction between management and advisors.
The crucial difference with a Supervisory Board
A Supervisory Board is a statutory corporate body with powers enshrined in the articles of association, regulated in Article 2:140 et seq. of the Dutch Civil Code for public limited companies (NV) and Article 2:250 et seq. of the Dutch Civil Code for private limited companies (BV). The Supervisory Board supervises the Management Board, advises the Management Board, and may, in certain cases, approve or refuse Management Board resolutions. Supervisory Board members are subject to their own liability regime pursuant to Article 2:9 of the Dutch Civil Code and are obliged to perform their duties properly.
An Advisory Board, on the other hand, is not a corporate body. It has no legal status, no powers enshrined in the articles of association, and no formal influence on decision-making. The advice is not binding, and the management board remains fully responsible for the company's decisions. Legally speaking, it concerns a group of advisors with a contractual mandate.
That distinction is of practical importance. Whoever establishes a Supervisory Board assumes responsibility; whoever establishes an Advisory Board purchases information and perspective. Both can be valuable, but the distinction must be clear to the board, shareholders, and advisors themselves.
What you arrange contractually with the advisors
An Advisory Board functions best when the role, powers, frequency, and remuneration are contractually established in an individual advisory agreement or in Advisory Board regulations. These documents describe at least the assignment, the frequency of meetings, the method of reporting, confidentiality, and the remuneration (fixed or performance-related, with or without stock options).
Confidentiality deserves special attention. Advisors are granted access to sensitive strategic, financial, and personnel information. A written confidentiality agreement with a penalty clause is therefore standard, with explicit provisions regarding IP, client and personnel data, and competing activities.
Liability must be carefully chosen. Advisors generally wish to limit their liability to intent or gross negligence, with a cap on the annual fee. This is usually acceptable, provided the advisor does not act as a de facto co-director. If this is the case, he may be classified as a de facto policymaker within the meaning of Article 2:248, paragraph 7 of the Dutch Civil Code, with all the associated liability risks.
When an Advisory Board is insufficient and you need to take decisive action
In the case of external financing by private equity or venture capital, an Advisory Board is usually insufficient. Investors often prefer a formal Supervisory Board with approval rights regarding specific decisions, as stipulated in the articles of association and the shareholders' agreement. Furthermore, in family businesses facing succession issues, a Supervisory Board offers greater institutional safeguards against conflicts between branches of the family.
For companies that wish to structurally review investment decisions of a certain size, or that operate in a regulated sector, a Supervisory Board is practically unavoidable. The non-binding nature of an Advisory Board then becomes a disadvantage.
Follow-up action
Are you considering establishing an Advisory Board or Supervisory Board, or is your existing governance stalled due to unclear responsibilities? Our corporate lawyers draft regulations, advisory agreements, and amendments to articles of association that suit the stage and size of your company.
