Definition and legal classification of the advisory board
An advisory board is a body that exercises advisory or supervisory functions in various legal and economic contexts. In contrast to bodies with decision-making authority, such as management or the executive board, the advisory board primarily has supporting powers. The legal structure of the advisory board varies depending on the type of company, articles of association, or individual agreement and is generally not mandatorily prescribed by law. Advisory boards are found particularly in companies, associations, foundations, as well as in the public and private sectors.
Legal foundations and types of advisory boards
Corporate advisory board
Advisory board in a GmbH
In the case of a limited liability company (GmbH), the establishment of an advisory board is not legally required but is possible through the articles of association or a shareholders’ resolution. The advisory board often acts as an advisory body to the management and takes on control, supervision, or mediation functions. Its powers, composition, and areas of responsibility are determined individually and are particularly laid down in the articles of association or rules of procedure.
Important tasks of the advisory board in a GmbH may include:
- Supervision and advising of the management
- Consent requirements for certain management measures
- Mediation in shareholder disputes
- Support with strategic decisions
A mandatory supervisory body, such as the supervisory board required in certain GmbHs under § 52 GmbHG in conjunction with co-determination laws, is not the advisory board.
Advisory board in a stock corporation (AG)
The German Stock Corporation Act does not provide for an advisory board. The AG is required under §§ 76 ff. AktG to create both an executive board and a supervisory board. However, the general meeting or the supervisory board can establish advisory boards. These have neither statutory rights nor obligations, but support the company through expertise or networks.
Other corporate forms
Advisory boards can also be established in limited partnerships (KG), general partnerships (OHG), or partnerships. Their powers are determined by contractual arrangement.
Advisory board in association and foundation law
In associations, the advisory board is, alongside the executive board under § 26 BGB, a frequently used body. It serves to support the executive board, supervises association decisions, and may perform mediation functions. The specific tasks are determined by the articles of association.
In foundation law, the advisory board often supervises the foundation’s executive board, supports the use of funds, and takes on advisory roles. Here too, the structure is determined by the respective foundation charter.
Advisory board in the public and private sectors
Apart from companies and associations, advisory boards also exist in public institutions, municipalities, universities, chambers, or cooperatives. Here, too, tasks and legal bases vary. They range from classic advisory roles, to participation, up to the right of prior approval for certain matters if provided for by articles of association or law.
Tasks and functions of the advisory board
Advisory function
The core task of an advisory board lies in advising the management or the statutory management body. Due to changing corporate or statutory designs, this function may be strategic, technical, or mediating.
Supervisory and control function
In some companies, the advisory board voluntarily undertakes supervisory tasks. This particularly concerns supervision of the management or compliance with compliance rules. Unlike the statutory supervisory board, there are no legally defined powers for the advisory board.
Mediation and conciliation function
The advisory board can assume a conciliation role in family-owned companies or partnerships, particularly in disputes between shareholders or members. Such functions are usually regulated in the articles of association.
Scope of authority and decision-making powers
Basically, as a non-legal body, the advisory board is not vested with its own decision-making powers over the company or the enterprise. However, it can be granted prior approval rights within the framework of the articles of association and thereby influence certain management measures.
Composition and appointment of the advisory board
Number and selection of members
The number of members is freely determinable and is stipulated in the articles of association, partnership agreement, or supplementary rules of procedure. Composition is often based on the needs of the company or association and may include both external and internal members.
Appointment, dismissal, and term of office
Appointment is usually made by the shareholders’ meeting, executive board, supervisory board, or a comparable decision-making body. Dismissal and terms of office are also stipulated by contract. Articles of association often allow for members to be dismissed at any time.
Rights and obligations of advisory board members
Advisory board members are generally subject to the provisions contractually or statutorily established. A statutory duty of confidentiality does not exist automatically, but is usually part of service contracts or the articles of association. Members incur special liability within the scope of their functions only insofar as advisory or supervisory activities result in breaches of duty towards the company or third parties and these are contractually linked to the company.
Distinction from other corporate bodies
Advisory board versus supervisory board
In contrast to the statutory supervisory board, whose rights and duties are regulated in the Stock Corporation Act and co-determination laws, the advisory board is an optional, voluntary, and individually structured body. It lacks executive or mandatory supervisory rights, as are accorded to a supervisory board.
Advisory board versus executive board and management
While the executive board and management are responsible for running the business and representing the company, the advisory board is limited to a supporting or advisory role without the authority of representation.
Liability and remuneration of the advisory board
Liability issues
The liability of advisory board members is governed by general civil law, in particular §§ 280 ff. BGB for any breaches of duty in connection with advisory board activities. Strict corporate organ liability according to stock corporation or GmbH law does not apply, unless the advisory board is endowed with powers that are effectively equivalent to those of a corporate organ.
Remuneration
Remuneration of advisory board members is not regulated by law and may be either unpaid or remunerated. Contractual agreements in articles of association or individual service contracts determine the amount of compensation or reimbursement of expenses.
Significance and practice of the advisory board
The advisory board is gaining increasing importance, particularly in family businesses, business successions, or to extend entrepreneurial expertise. Due to its flexible structuring options, the advisory board is well suited as an instrument for advice, supervision, and safeguarding the interests of various stakeholder groups.
Summary
The advisory board is a legally versatile body that mainly assumes advisory, supervisory, or mediating duties. Its powers, composition, and obligations are governed by the articles of association, partnership agreement, or corresponding agreements. The establishment of an advisory board offers companies, associations, and foundations numerous advantages with regard to management, supervision, and conciliation, but does not replace statutory bodies such as the executive board or supervisory board where required by law.
See also:
Frequently Asked Questions
Who is liable for the decisions of the advisory board?
The liability of the members of an advisory board largely depends on the legal design of the advisory board within the company. If it is a purely advisory body without its own decision-making and management powers, there are generally no independent organ duties towards the company as with managing directors or board members. Nevertheless, advisory board members can in principle be liable for damages caused by willfully or grossly negligent incorrect advice, especially if a breach of contractual secondary obligations can be proven. In rare cases, e.g. when taking over supervisory functions or exercising de facto management activities, organ liability pursuant to § 43 GmbHG or § 93 AktG analog may be considered. Additionally, personal liability towards third parties, such as creditors or shareholders, may arise if statutory or contractual duties are grossly neglected. Therefore, it is advisable to define the tasks and responsibilities of the advisory board carefully and clearly in the articles of association or advisory board contract and, if applicable, to take out D&O insurance for advisory board members.
How is an advisory board legally appointed or dismissed?
The appointment and dismissal of advisory board members generally follow the provisions of the respective company’s articles of association or a corresponding shareholders’ resolution. If the articles contain no specific regulations, the general provisions of the German Civil Code (§§ 705 ff. BGB for partnerships under civil law) or special statutory provisions (e.g. §§ 52 ff. GmbHG in conjunction with the partnership agreement) apply for optional advisory boards. In the case of a GmbH or an AG, advisory board members are usually appointed upon the proposal of a committee or by majority decision of the shareholders’ meeting and dismissed accordingly. The modalities, in particular deadline, form, and quorum, should be clearly stipulated in the partnership agreement or in the advisory board’s rules of procedure. As a body, the advisory board has no statutory protection against dismissal at any time unless the articles of association stipulate otherwise.
What rights and obligations does an advisory board have in the legal sense?
The legal rights and obligations of an advisory board are mainly defined by the company’s articles of association, the advisory board contract, and any applicable rules (e.g., rules of procedure). Typical rights include the right to information, advice, and audit in relation to the management or executive board, and in some cases, participatory rights concerning certain transactions (veto rights, approval requirements). Obligations derive particularly from the fiduciary performance of assigned tasks, the duty of confidentiality with regard to business and company secrets, and, where applicable, a duty to monitor certain measures. If the advisory board is given further decision-making powers (such as approval requirements for investments), requirements of due care and liability may increase. Statutory participation duties arise in particular in co-determined companies (co-determination pursuant to the One-Third Participation or Co-Determination Act).
Is work on an advisory board subject to remuneration?
Whether and to what extent advisory board members receive remuneration primarily depends on the provisions in the partnership agreement or advisory board contract. In principle, the role may also be unpaid, provided no contrary agreement exists. However, an allowance for expenses, attendance fees, or a fixed annual remuneration is often paid. The tax and social security treatment of remuneration must be examined separately, as its classification as self-employed or as dependent employment can differ depending on the nature of the tasks and the member’s integration into the company. Payment should be established transparently and in writing to avoid later legal disputes.
What rights of participation does an advisory board have compared to a supervisory board or management?
Legally, the classic advisory board (especially in a GmbH) differs from statutory bodies such as the supervisory board or management. While a supervisory board has legal control and oversight duties (§ 52 GmbHG, §§ 95 ff. AktG), the advisory board is an optional body with only those powers that are expressly assigned to it by the articles of association or rules of procedure. If the articles allow, the advisory board can define transactions requiring approval for certain management actions, but does not have original authority to issue instructions. Management remains fundamentally independent unless otherwise stipulated under corporate law. The right to information and audit, participation in personnel decisions, or convening the shareholders’ meeting is available to the advisory board only if this has been expressly agreed.
Can the advisory board legally block management decisions?
Whether an advisory board can block management decisions depends solely on the powers agreed in the company’s articles of association. As a rule, the advisory board has only an advisory function and therefore cannot prevent decisions. However, if the articles specifically provide for approval or veto rights for certain transactions, the advisory board then has legally binding effect: the management may only carry out specific measures with (majority) approval of the advisory board, otherwise such actions would be provisionally invalid or contestable. However, the advisory board must not be granted comprehensive management authority, as this would violate the distinct separation of organ competencies. The formal validity and limits of such veto rights are regularly subject to corporate legal disputes.
Is an advisory board subject to specific legal regulations?
Unlike the supervisory board and executive board, there are no uniform statutory regulations for advisory boards in company law. Their structure is largely discretionary and to be set out in the articles of association. Exceptions include co-determined companies and special forms such as the mandatory advisory board in certain stock corporations (§ 30d WpÜG). If advisory board members are employee representatives, special labor law and co-determination rules apply. The general principles of civil and company law (in particular the duty of loyalty and due diligence pursuant to § 242 BGB) also apply to advisory board members. In addition, relevant tax, data protection, and criminal law provisions may become relevant, for example in the event of breach of confidentiality.
