It's Honorary, Rather Like A Knighthood

Some writer for the UK Guardian, writing about Kentucky Fried Chicken, felt it necessary to disparage "Colonel" Harland Sanders and point out that Sanders was only a private in the US Army.

The rank of Kentucky Colonel, although once an actual rank in the state militia with regular military duties, long has been an honorary title only, given to prominent people. You can see a partial list of people who have joined the ranks of Kentucky Colonels here.

Basically, then, the rank is similar to titles of nobility, granted to friends and acquaintances of the monarch. In the US where such titles are forbidden by law, military rank suffices instead.