Publications / Corporate Advisory
Appointing a Corporate Advisory Board (CAB) offers companies an immediate injection of expertise and opens up a pool of future director talent. McCullough Robertson corporate advisers, partner Reece Walker and lawyer, Elissa Etheridge, consider the pros and cons of CABs.
Growth-focused small to medium enterprises (SMEs), as well as listed companies with specific skill requirements, are increasingly taking advantage of the benefits that a CAB can offer.
A quick glance at some of the benefits include:
- potential to test future director talent pool - opportunity for both sides to ‘try before you buy’
- immediate injection of expertise and source of strategic thinking
- can provide a springboard for growth by SMEs, or for specific transaction input (IPOs, M&A deals), and
- lower risk (for both parties) than director appointment - advisory role without the decision-making responsibilities.
What is a CAB?
A CAB is a stand-alone structure and is separate to the formally appointed Board of Directors. CABs generally provide an additional strategic resource to the incumbent directors and a sounding board for management. They focus on the strategic initiatives, organisational development and financial vision of the company.
Crucially, however, CABs are not decision making bodies and ignoring this distinction can be perilous for both a company and its CAB members for the reasons detailed below.
Why ‘try before you buy’?
A CAB can be an ideal ground for future director talent to be tested in a low profile environment. Equally, CAB members can ensure the company is the right fit for them for a future potential directorship. There is no long-term commitment to retaining a CAB, or a particular member of a CAB, if there is no value being added. In effect, it allows both sides to ‘try before they buy’.
Advisory board members are not directors and do not therefore have corresponding statutory or fiduciary duties. Rather a CAB acts as an independent source of information, ideas and resource for the company’s directors and executive with as general or specific a mandate as the company desires. For example, a CAB may be appointed to generally assist in growth strategies, or to provide specific succession planning advice, or transaction input (e.g. around an IPO process or M&A deal). Some are appointed for specific attributes, such as professional reputation, geographic knowledge or scientific skills. Whilst a retainer of some sort is usually paid, this is typically nominal in comparison to the costs of a full-time directorship, which necessitates a broader and far more active role.
Some of the other advantages to establishing a CAB:
- obtaining an independent, fresh look (challenge the ‘status quo’)
- easily appointed and removed
- role can be as specific or general as the company requires (under charter or terms of appointment)
- access to enhanced skillsets, independent ideas, pragmatic advice (‘been there before’), expert qualifications or strategic thinking
- can be a vehicle for focused growth or transaction-readiness
- contact with expanded networks and associations
- expanded reputation and credibility in industry and investor/consumer market
- mechanism for director/executive succession planning
- lower cost than director appointment
- lower risk than full-time appointment
- lower profile in ‘testing’ phase - not disruptive, and
- limited ‘control’ risk.
The trend in establishing CABs is prevalent in companies of all shapes and sizes and across all industries.
There has been a significant increase in appointment in the SME space, especially in engineering, manufacturing, transport, resources, retail, IT and life sciences industries. It is also a significant trend in the agribusiness space as rural family operations look to corporatise or make other succession plans.
Member appointments to CABs are reflective of the needs set out below, but may include experienced professionals such as lawyers or accountants, or specialists with relevant industry or commercial experience.
To maximise the benefit of a CAB, some additional aspects need to be considered.
When and Who?
Prior to appointing a CAB, it is important for the company to determine its objectives. The key objectives will dictate when establishing a CAB will be most advantageous and determine the skill set of the candidates to appoint.
Advisory boards can be appointed for many reasons ranging from macro broad organisational objectives to specific micro targeted aims. As such there is no right or wrong time to appoint a CAB. Some common examples of when organisations establish CABs include:
- the transition from a private company to a public company or public unlisted to listed company - i.e. a growth company entering the next phase
- a private or start-up company where a full board of directors is not necessary but outside advice is required
- additional expertise is an advantage - e.g. a scientific advisory board for a biotech company
- for a particular large transaction or venture - for input on strategy or building strategic partnerships
- where a company has a large number of stakeholders and requires broad advice
- as a succession plan for retiring directors, and
- not-for-profit entities.
Advisory boards can also play an important role in the supervision of the good corporate governance of the company.
The objective for the CAB and the particular needs of the business determine the skill set of the CAB members. In addition to considering what mix or specific expertise and experience is relevant and desired, other factors to take into account when selecting an advisory board member include:
- cultural fit and value congruence with the organisation
- communication skills
- reputation in industry
- availability and time factors, and
- working relationship with CEO/management.
A CAB can prove to be a tremendous resource for a company CEO, from which to draw advice and executive insight to implement and report to the board. It is therefore important to carefully determine the size and membership of any CAB.
What are the roles and limits of the CAB? - Risk of being ‘Shadow Directors’
CABs are not regulated by the Corporations Act 2001 (Cth) (Corporations Act). CABs are independent and distinct from the Board of Directors and do not have decision-making authority. A CAB’s role is to advise. As a consequence, CAB members therefore are not subject to the statutory, common law or fiduciary duties that bind directors of a company.
There are however, legal and practical issues to consider when establishing or accepting a position on a CAB. In particular, ensuring an advisory board member is not deemed to be a director or ‘Shadow Director’ and thereby involuntarily invoking these duties, is high on the list of considerations.
Chapter 2D of the Corporations Act sets out particular duties of directors and ‘other officers’ of a company.
Section 9 of the Corporations Act defines an ‘officer’ to include a director or secretary of a company, and importantly includes a person who participates in the decisions that affect a substantial part of the company’s business, or who has significant influence within the company, or whose instructions or wishes the directors of a company are accustomed to act in accordance with, but who importantly may not have been formally appointed to a management position.
Accordingly, depending on the actual level of control the person may have and whether they hold themselves out to the public as being a person having authority with respect to the business affairs of the company, such as having the description of ‘director’ on business cards, that person may be held to be either a ‘de facto director’ or ‘shadow director’ under the Corporations Act.
Essentially, if the CAB member participates in decisions that affect a substantial part of the company’s business, they may be considered a ‘de facto director’ of the company. Similarly, if they are a person in accordance with whose instructions the director or directors of the company are accustomed to act, it is possible that the advisory board member would be considered a ‘shadow director’.
If an advisory board member is held out as such, the statutory liabilities ordinarily attached to duly appointed directors, also attach to de facto and shadow directors.
It is therefore important to select appropriate CAB members for the required advisory purpose and put in place practical measures to prevent any such potential liabilities.
How in practice?
From a risk minimisation viewpoint it is important to ensure that the CAB members are not deemed to be either de-facto or shadow directors of the company.
The CAB’s role and mandate should be as defined, determined and documented as possible to clearly separate the functions of the CAB and the Board of Directors. One way of doing this is to prepare a CAB Charter which sets out the purpose, powers, composition, meeting and procedural requirements and prohibitions of the CAB. This may also be supported by specific terms of appointment for individual members, which are crafted to be consistent with the Charter.
Members of the CAB should not:
- vote on or purport to pass resolutions on behalf of the board
- hold themselves out to be directors of the company
- be a signatory to any bank accounts of the company, or
- be appointed as a power of attorney for a company.
It is important to ensure that the CAB remains advisory only and that direct participation in decisions that affect a substantial part of a company’s business are avoided. Further, it is important that management not be seen to ‘act at the direction of’ the CAB. In this regard, it will be crucial to ensure that the board minutes are appropriately recorded, particularly if a CAB member is present as an ‘observer’. Separate CAB committee meetings should be held and accurately documented.
CABs represent a potentially valuable resource to drive growth and profitability. Properly structured they represent a low-risk, low-cost proposition. By observing these practical guidelines and carefully considering objectives and the composition of a CAB, companies can reap the benefits of readily available, independent and strategic advice while effectively testing potential future decision-makers. It’s a ‘try before you buy’ option that will suit many organisations.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.