Insight

The Advisory Board as a Governance Tool for Oversight, Conflict Prevention and Succession

An advisory or consultative board: its composition, liability and the role of the board in the succession process of a family business.

17 July 2026 | Reading time 7 min. | Author: Martin Neupert

In a family business, an advisory board can bridge the gap that arises when the group of shareholders expands, the next generation takes over, or a managing director from outside the family assumes operational management for the first time. Unlike the supervisory board of large companies, it is generally a voluntary body whose tasks, powers and composition can be freely defined, ranging from a purely advisory role to genuine co-determination. This article explains how it is enshrined in the articles of association in accordance with Section 52 of the German Limited Liability Companies Act (GmbHG), the importance of external members, and the advisory board’s greatest impact during generational succession.

Why an advisory board: the gap between ownership and management

As long as the founder is the sole manager and sole owner, ownership and management go hand in hand. With each new generation and every expansion of the shareholder base, however, these two aspects become increasingly separate. A single shareholder becomes siblings; siblings become clans; and some of the owners become detached from day-to-day operations. At the same time, a managing director from outside the family often takes the helm.

This development gives rise to a governance problem. The shareholders' meeting convenes too infrequently and is too large to provide effective oversight of the managing director. A single shareholder cannot, or does not wish to, take on this role. The advisory board fills this gap by advising and monitoring the managing director and, depending on its structure, involving it in key decisions.

This has a twofold benefit for the family. On the one hand, the advisory board brings professional objectivity and experience to the management. On the other hand, it creates a structured forum in which the owners’ interests are consolidated, rather than coming into direct conflict with one another at the shareholders' meeting.

The advisory board neither replaces the shareholders' meeting nor the managing director, but acts as a third element between them. It relieves the shareholders' meeting of the burden of day-to-day oversight and provides the managing director with a point of contact who is closer to the business than the owners and more independent than any individual shareholder.

Advisory or consultative board: the scope of its remit

The key decision concerns the scope of authority. An advisory board supports the managing director with advice and experience, but does not intervene in management in a binding manner. It acts as a sparring partner, whose influence is based solely on authority and expertise. For many families, this is the right starting point, as it strengthens management without curtailing its authority.

The co-determinative advisory board goes significantly further. Genuine powers can be delegated to it, such as the right to withhold approval for major transactions, including significant investments, borrowing or property deals. In its strongest form, it can even appoint and dismiss the managing directors. This makes the advisory board the actual supervisory body, representing the owners vis-à-vis a management team from outside the family.

The function determines the choice between the two forms. If the sole aim is to bring in experience, an advisory board is sufficient. Effective oversight of a managing director from outside the family and the safeguarding of the owners’ interests during generational succession, on the other hand, require approval rights and the power to appoint and dismiss management.

It is important to formulate the delegated approval powers precisely. A list that is too broad paralyses the managing director. One that is too narrow undermines the board’s authority. Clear thresholds have proven effective, above which a transaction requires approval – for example, for investments, loans or shareholdings exceeding a certain amount.

Legal basis: Articles of Association and Advisory Board Regulations

An advisory board is established only by means of an explicit provision. The basis for this is the articles of association, which create the body and define its status. In the case of a limited liability company (GmbH), Section 52 of the German Limited Liability Companies Act (GmbHG) permits the establishment of an advisory board or supervisory board, whilst allowing the provisions of company law to be declared applicable in whole or in part, or for the company to set its own rules. This freedom of organisation is the real advantage of a voluntary advisory board.

The details are set out in the advisory board regulations: the composition, appointment and term of office of the members, their duties and conditions for approval, the decision-making process, the frequency of meetings and remuneration. In this way, the regulations translate the fundamental decision laid down in the articles of association into a workable framework.

The voluntary advisory board must be distinguished from the statutory supervisory board. If the company exceeds certain employee thresholds, corporate co-determination applies, for example under the One-Third Participation Act or the Co-Determination Act. In this case, a supervisory board comprising employee representatives is mandatory. The freely structured family advisory board must be kept separate from this. Where the thresholds are reached, both levels must be coordinated with one another.

This also means integrating the advisory board with the family’s other governing frameworks. If there is a family constitution or a shareholders’ agreement, the provisions regarding the role and composition of the advisory board must be consistent with the articles of association. If the documents contradict one another, this creates precisely the uncertainty in the event of a conflict that the advisory board is actually intended to prevent.

The composition: family members, external experts and independence

The effectiveness of an advisory board depends largely on its composition. A committee made up solely of family members often merely perpetuates familiar patterns of conflict. It is only the inclusion of external members that brings professional objectivity, experience from other organisations and a voice that is not beholden to any particular faction. An independent chairperson, in particular, can mediate within the family on matters that can no longer be resolved internally.

A tried-and-tested composition combines both aspects: a few shareholders or family representatives who know the company and its values, as well as one or more external experts with industry-related or commercial experience. The chair should have the necessary authority to mediate between management and the owners.

In addition, the term of office, reappointment and remuneration must be regulated. Appropriate remuneration is essential for attracting and retaining qualified external members. Without it, the role remains unattractive to qualified candidates.

The term of office should be long enough to have an impact, but also limited enough to allow for renewal. It is common practice to appoint members for a few years with the possibility of reappointment. A phased rotation of members preserves the board’s collective experience and prevents the loss of all its knowledge at the end of a specific term.

Liability and Duties of Advisory Board Members

With greater powers come greater responsibilities. An advisory board member is subject to duties of care and loyalty and is obliged to maintain confidentiality regarding the company’s affairs. If they culpably breach these duties and the company suffers loss as a result, they may be held liable.

The extent of liability depends on the scope of their responsibilities. In the case of a purely advisory board, whose opinions are non-binding, the level of responsibility is lower. In contrast, where the advisory board exercises genuine management authority through rights of approval and personnel decisions, the level of responsibility increases significantly. The standards of care then correspond almost exactly to those of a supervisory board.

Protection is necessary to cover this liability. Directors’ and officers’ (D&O) insurance that explicitly covers the advisory board protects its members and makes the role acceptable to qualified external candidates in the first place. The advisory board’s rules of procedure should clearly set out the duties, confidentiality and liability issues, so that the fundamentals are not disputed in the event of a crisis.

Furthermore, the relationship with the managing director must be clarified in the event of an emergency. The advisory board monitors, but does not manage the business itself. If it crosses this line and effectively intervenes in management, its liability may be extended. A clear delineation of responsibilities in the advisory board regulations therefore protects both sides and keeps the areas of responsibility separate from one another.

The Advisory Board in the succession process

The advisory board is most effective during generational transition. When the outgoing owner hands over operational management, but the next generation is not yet ready or a managing director from outside the family steps in, the Advisory Board ensures continuity. It oversees external management in the family’s best interests and provides a stable framework for the transition.

At the same time, it helps to prevent conflicts. In a shareholder group comprising several family branches, the advisory board centralises oversight in one place, rather than allowing each branch to interfere individually in the management of the business. An independent chairperson can mediate between the family branches, thereby preventing differences of opinion from escalating into a deadlock within the company.

In this way, the advisory board acts as a bridge between ownership and management across the generational transition. It supports the successor during their induction, ensures that the knowledge of the outgoing generation remains available within the board, and guarantees that the handover is embedded within the organisation and is not dependent on individual persons. Ideally, it should be established years before the handover so that it is well-established by the time it is needed.

The advisory board can also act as a guardian of the succession arrangements put in place. We explain exactly how this works in our article on business succession in Mittelstand. It ensures that the provisions set out in the articles of association and in the transfer agreements are actually implemented. In this way, it offers the outgoing generation the assurance that their decisions will remain in force even after they have stepped down as managing directors. Thus, a supervisory body becomes an anchor of stability that extends beyond the generational transition.

About the author

Martin Neupert

Partners · Property and Procurement

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Martin Neupert is a solicitor and founding partner of Maxfeld.legal. For over 30 years, he has been advising family businesses and their shareholders on company law and corporate governance, and has been assisting with the establishment of advisory boards as part of the succession process.

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Frequently asked questions about the advisory board in a family business

What is the difference between an advisory board and a consultative board?

The advisory board supports the managing director with advice and experience, but does not intervene in a binding manner. Its influence is based on authority and expertise. The advisory board with co-determination powers, on the other hand, is vested with genuine powers, such as the right to withhold approval for significant transactions or, in the strongest form, the power to appoint and dismiss the managing director. This makes it the actual supervisory body. The composition of the advisory board depends on its function.

Does a family business absolutely need an advisory board?

No. In Mittelstand, the advisory board is generally a voluntary body. A mandatory supervisory board is only required once the company exceeds certain thresholds in terms of the number of employees and employee co-determination comes into effect, for example under the One-Third Participation Act or the Co-Determination Act. A voluntary advisory board is useful when the group of shareholders grows, the next generation steps in, or a managing director from outside the family takes over the reins.

How is an advisory board established in law?

The basis for this is the articles of association, which establish the body and define its status. In the case of a limited liability company (GmbH), Section 52 of the German Limited Liability Companies Act (GmbHG) permits the establishment of an advisory board and the application of the provisions of company law in whole or in part, or the adoption of the company’s own rules. Rules of procedure for the advisory board govern the details, namely its composition, term of office, duties, conditions requiring approval, decision-making and remuneration.

Who should sit on the advisory board?

This tried-and-tested structure combines family representatives, who are familiar with the company and its values, with one or more external experts who have industry-related or commercial experience. This external perspective provides professional objectivity and a voice that is not beholden to any particular faction. The chair should have the authority to mediate between management and the owners. Appropriate remuneration is essential for attracting qualified external candidates.

Are members of the advisory board liable?

Yes, they are subject to duties of care, loyalty and confidentiality. They may be held liable in the event of a culpable breach of duty that causes damage to the company. The extent of liability depends on the scope of their responsibilities: Whilst the level of responsibility is lower for an advisory board, the standards of care for a board with co-determination powers and genuine managerial authority are closer to those of a supervisory board. D&O insurance that covers the board protects its members.

What role does the advisory board play in business succession?

It ensures continuity during the generational handover. If the outgoing owner steps down from management but the next generation is not yet ready, or if a managing director from outside the family steps in, the advisory board oversees management in the family’s best interests and provides a stable framework for the transition. In a group of shareholders comprising several family branches, it centralises oversight and can mediate between the branches. Ideally, it should be established years before the handover.

The Advisory Board as a Governance Tool for Oversight, Conflict Prevention and Succession

Why an advisory board: the gap between ownership and management

Advisory or consultative board: the scope of its remit

Legal basis: Articles of Association and Advisory Board Regulations

The composition: family members, external experts and independence

Liability and Duties of Advisory Board Members

The Advisory Board in the succession process

About the author

Setting up an advisory board properly

Frequently asked questions about the advisory board in a family business

More articles on this topic

Get in touch

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