The independent director—also known as an outside director—is a member of a board of directors who brings a unique, unbiased perspective.
The term “independent director” is commonly used to denote a director who’s not an employee of the firm or organization where they serve on a board. Whether they serve on a board of directors or a board of trustees, it’s their responsibility to oversee the company’s affairs and make sure its mission is fulfilled.
With the increasing importance placed on corporate governance, companies are beginning to pay more attention to board members whose purpose is solely to provide oversight.
The distinction between inside versus outside directors is crucial in corporate governance. This guide will help you prepare for a board meeting and, most importantly, determine if an independent director is right for your company.
What is an Independent Director?
An independent director is a director who is not an employee of the company and doesn’t hold a personal stake in any of its business (e.g., stock ownership). Instead, these directors serve on boards for many different reasons, often to provide leadership, improve strategy and governance, help with succession planning, and serve as liaisons between shareholders and management.
Independent directors don’t have a conflict of interest with the companies where they serve. They bring unique expertise, perspective, and background to the boardroom table. And most importantly, they help maintain an objective viewpoint during decision-making.
Independent Director Roles and Responsibilities
Independent directors are essentially outside directors who play an important role in corporate governance. They provide unbiased advice, perspective, and judgment to the board of directors. They’re also responsible for evaluating the strength of their board, especially monitoring conflicts of interest and complying with corporate governance guidelines.
While they’re a key part of the company’s board of directors, they bring a unique perspective, mainly because they have no material relationship with the company.
The independent directors’ duties and responsibilities typically include:
- On matters such as finances, strategy, performance, risk management, and key appointments, they must give independent judgment to the board.
- Play an active role in succession-planning.
- Protect the interests of all stakeholders.
- Balance the interests of all stakeholders while making deliberations.
- Set appropriate remuneration levels for the company’s top executives and managers.
- Provide an objective perspective and opinion regarding the organization’s status and key corporate decisions.
- Monitor the integrity of financial information and risk management, ensuring relevant controls are in place.
- Report unethical behavior, fraud, or violations of company policies.
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Frequently Asked Questions (FAQ)
What Does an Independent Director Do?
Independent directors are responsible for ensuring the company operates in a legal and ethical manner. They also help to strengthen the board’s independence from management by providing independent insight and advice.
They play a vital role in corporate governance and act as a check and balance to the power of the CEO, management, and other stakeholders.
Do Independent Directors Get Paid?
Yes. According to the independent director compensation policy, there are different types of compensation that independent directors receive. First, all independent directors are required to receive an annual retainer fee. Secondly, they are entitled to meeting fees (sometimes called sitting fees) for meetings they attend.
In addition, if the independent director serves on certain committees such as audit or compensation committees, they typically earn additional compensation. Finally, independent directors may receive equity compensation in the form of stock awards.
However, some companies don’t pay independent directors to coordinate or serve on their board. Instead, they are typically reimbursed for any expenses incurred while performing their duties. Generally, independent directors are not paid a salary but are entitled to receive compensation for their time and effort in attending board meetings.
Who Appoints an Independent Director?
An independent director is typically appointed by the board of directors or the nominating committee. However, in some cases, a shareholder may be able to petition for an independent director.
What Is the Difference Between a Director and Independent Director?
Directors are individuals who serve on a company’s board and oversee various areas of operations within a company, such as finance, human resources, and marketing. They represent the interests of the company and key stakeholders, such as creditors and employees.
Independent directors aren’t associated with the company in any way other than serving on its board. For example, they don’t work for it or have any business dealings with it. Instead, they have a fiduciary duty to act in the best interests of the company and its stakeholders.
In other words, a director is an individual who works for the business on behalf of shareholders, while an independent director serves on a corporation’s board of directors but doesn’t have any direct connection or material relationship with the business.
Final Thoughts
Having independent directors demonstrates the board can make unbiased decisions in the best interests of the company. An effective board needs inside and outside directors to provide the perspectives to fulfill their fiduciary roles.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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