Protecting your advisory board: uncertainty over liability exposure means that liability may exist, so various protections for an advisory board are still necessary.

• Author: Murray, Susanne
• Position: D & O INSURANCE

IT'S NOT "directors, officers, and advisory board members insurance," and state corporation statutes don't generally mention advisory board members either. There is no clear legal role, no delineated job responsibilities, and no decision-making authority of advisory board members in United States companies.

Questions abound about the right of a company to establish an advisory board or an advisory committee, and about the purpose of such a board or committee. Does the standard board of directors have the authority to establish a separate advisory board for their own use? Can they, should they, or do they delegate responsibility to this advisory board? For individuals asked to serve in this advisory capacity, can they find protection from liability, either from the companies that they serve, or from insurance?

For many companies that establish advisory boards, or an advisory committee, the value of such additional advice is to have a separate, objective sounding board that can provide information and respond to ideas, without formal management or board responsibility. Smaller private companies, or family-owned companies, may establish advisory boards made up of the various advisers the company may retain for different purposes. This might include outside accountants, attorneys, major clients, bankers, vendors, or others. Certain industry sectors are also more likely to establish advisory boards or advisory committees, although these may function more as honorary roles (without compensation).

For certain jurisdictions outside the U.S., separate advisory boards entirely unaffiliated with the company may be considered mandatory. Public companies might establish advisory boards in response to a specific issue or event. For example, a company that has determined to expand on its diversity hiring might gather together individuals who are deemed to be high profile and to be well known for diversity issues. Sometimes, these types of advisory boards have limited life spans.

In considering whether to serve on an advisory board, most individuals are interested in knowing the degree of their potential for liability and the degree of protection available to them for their service in such capacity. First, are they entitled to indemnification from the companies that they serve? This is an important question because many companies that have established rights to indemnification have probably focused solely on directors and officers. Indemnification may extend to employees. It is less likely that companies automatically cover others, including agents or advisers.

Company Indemnification

To its directors, officers, and pertinent others (such as advisory board members), an organization's ability and willingness to indemnify them for liability is crucial to their willingness to serve the organization. While the limit of this promise is conditioned by the law of the state where the organization is incorporated or domiciled, most organizations include broad indemnification provisions in their charter, certificate of incorporation, or bylaws, demonstrating their commitment to protect their executives. Indemnification language contained in a company's bylaws or articles of incorporation may look something like that reproduced in the accompanying box (see page 36).

In addition to indemnification that may be granted pursuant to an organization's bylaws or articles, some companies enter into individual indemnification agreements, either as part of an employment agreement or simply as a separate contractual document. In such an instance, the individual entering into the agreement will often feel more specifically protected because the document expressly applies to him or her.

State Corporation Statutes

As a general matter, organizations adopt indemnification provisions that are at least as broad as...