Inside vs. Outside Directors: What’s the Difference?

An outside director is a board member who serves on a company’s board, but is neither a stakeholder nor an employee. This director is also called a non-executive board member or an independent director. They receive a retainer fee of cash, benefits, or stock options for serving on the board.

Outside directors don’t engage in the daily management of the organization. Instead, they are heavily involved in policy-making and planning. Like inside directors, they have a fiduciary duty to prioritize the company’s and corporate stakeholders’ best interests. They also monitor executive directors to enhance accountability and ensure the company follows the right path. 

Outside directors have one significant advantage over inside directors. They are considered more objective, and because they don’t have to worry about keeping their job within the organization, they can speak freely and objectively. As a result, they may see the big picture differently than their counterparts. Generally, they are likely to provide unbiased advice and bring external expertise from their personal and professional experience.

Outside directors have disadvantages too. Because they are less involved with the organization they represent, they may lack sufficient information to base their decisions. Moreover, they may face out-of-pocket liability if the company is not adequately insured.