Minimising Risk and Legal Liability for Advisory Boards

Minimising risk and legal liability for advisory boards is crucial to protect both the advisory board members and the organisation.

The application of best practice, in an advisory board context, creates an environment that considers how to maximise opportunity and minimise risk.

While advisory boards typically have fewer decision-making powers compared to boards of directors, their recommendations and guidance can still expose them to legal risks. The global framework for advisory board best practice, the ABF101 Advisory Board Best Practice Framework™, has recently been updated with new guidelines due to the varying risk profiles of advisory boards within governance systems.

Effective risk management for advisory board is the responsibility of both the organisation and individual advisory board members.  Organisations must carefully consider the evaluation, implementation and ongoing management of their advisory board.  Equally, individual advisory board members, who may be internal or external representatives, have a duty to keep their skills and knowledge current and fully understand the context of their advisory engagement.

Here are several strategies to minimise risk for advisory boards:

Clarify the Role and Authority of the Advisory Board

• Formalise the Scope of Responsibilities: Define the role of the advisory board clearly in governance frameworks.  Document this is the charter, including key information such as specifying that the advisory board provides guidance and advice without formal decision-making power.
• Avoid and Address Blurring Roles and Responsibilities: Ensure that advisory board members are not treated as decision-makers or delegated tasks that belong to the board of directors or management.

Fiduciary Duty Awareness

• Educate Members About Fiduciary Duties: Even though advisory board members typically do not have fiduciary responsibilities like directors, they may still be held liable if they engage in actions that could harm the organisation. Providing training on potential liability areas such as conflicts of interest, confidentiality, and ethical considerations can help members understand their obligations.
• Duty of Care: Ensure that advisory board members make recommendations based on sound, informed judgment and have access to all relevant information before providing advice.

Provide Legal Protections

• Indemnification Provisions: Include indemnification clauses in governance documents that protect advisory board members from personal liability for actions taken in good faith within the scope of their role.
• Fit for Purpose Documentation and Agreements:  Ensure the organisation has fit for purpose documentation and agreements tailored to the governance framework and advisory board context.  Maintain up to date agreements with all advisory board members, including a disclosure process if there is a change in circumstances.

Encourage Active Participation and Due Diligence

• Regularly Review Key Information: Advisory board members should stay informed about the organisation’s operations and strategic decisions to ensure their advice is based on accurate and timely information.  Additionally, regular reviews of the advisory board conducted by the internal sponsor and the chair supports the proactive monitoring of best practice and alignment to the organisation’s priorities and governance framework.
• Maintain Appropriate Documentation: Keeping detailed minutes of advisory board meetings, including any considerations provided, can create a record that demonstrates due diligence and good faith efforts by the advisory board members.  Documenting and understanding the internal or external flow of information to, within and from the advisory board further strengthens how and where information is used to inform decision making.

Separate the Advisory and Governance Functions

• Maintain a Distinct Line Between Advisory and Governing Roles: Avoid giving advisory board members any voting rights or governance responsibilities that are typically reserved for directors. This distinction can help minimise the chances of advisory board members being viewed as de facto directors, which could increase their liability.
• Limit Access to Sensitive Information: While advisory boards often need access to some organisational data, limiting their exposure to sensitive legal or financial documents may help reduce potential liability for misuse or mishandling of confidential information.

Obtain Expert Advice When Necessary

• Consult Legal and Financial Experts: Advisory board members should not hesitate to recommend the engagement of professional advisors (legal, financial, or regulatory) when complex issues arise. Relying on expert opinions can help mitigate the risk of liability stemming from inaccurate or incomplete recommendations.

Implement a Code of Conduct

• Establish Ethical Guidelines: Create a code of conduct for advisory board members, outlining standards for ethical behaviour, conflict of interest management, and confidentiality. This can provide a framework for their advisory role and reduce the risk of improper conduct.  For example, Advisory Board Centre professional members support the application of ethical engagement through the professional Code of Ethics.  This can be further enhanced through the organisation’s consideration of the Code of Conduct for their specific advisory board engagement.

Advisory Board Reviews

• Conduct Periodic Reviews: Evaluate the advisory board’s impact and alignment to ensure that the advisory board is suited to the organisation’s priorities and governance framework. If necessary, adjust the advisory board’s composition, responsibilities, or processes to better manage risk and improve governance.

By taking these steps, organisations can reduce the risk of legal liability for advisory board members while ensuring they provide valuable insights and guidance.  Additionally, organisations can enhance their overall governance systems through the effective use of advisory boards to support and inform executives and directors.