Most board of directors members are required to get involved in several aspects of company operations. Their active input is necessary to perform board tasks and provide corporate governance for the business. But there is significant value in having alternate non-executive directors charged with providing oversight from a slightly more distant position. Executive leaders in many organizations are increasingly turning to independent directors to handle this responsibility.
In this article, we’ll explain why your company could use an independent director and what skills a person needs to make a positive impact in the role.
What is an Independent Director?
An independent director, also known as an outside director, is a director who does not represent the company and doesn’t hold a personal stake in any of its business, including 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 the management team.
The main difference between independent directors and standard “inside” directors is their perspective on the organization. Inside directors oversee multiple areas of the company and represent its interests on behalf of major shareholders, such as creditors and high-level employees. Independent directors are not associated with the organization in any form besides holding a seat on the board and have no material relationship with the business. This position helps outside directors avoid developing a conflict of interest and maintain an objective viewpoint during the decision-making process. Independent directors are often appointed by the board of directors or as nominee directors by the nominating committee, but there are also instances where a shareholder can petition for a shadow director as well.
While they are generally not paid an official salary, independent directors are compensated in several different forms. Outside directors are required to receive an annual retainer fee and meeting fees for each meeting they attend. These are also referred to as sitting fees.
Independent directors can receive additional payment if they serve on certain committees (most commonly the audit committee, compensation committee, and governance committee) and be compensated in the form of stock awards. In some instances, independent directors are reimbursed for any expenses incurred while performing their duties rather than being paid for serving on the board.
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Roles and Responsibilities of an Independent Director
Independent directors play a huge role in the corporate governance of an organization. Their separation from the day-to-day management of the company is an asset for those in the position. The unique vantage point allows these directors to provide unbiased reviews regarding the performance of other board members and the establishment as a whole. This helps the company make better decisions to achieve its goals in the present and the future.
The scope of the job varies depending on the needs and makeup of the organization, but the duties of independent directors usually include the following:
- Provide impartial opinions on the organization’s status and key corporate decisions
- Analyze the financial management, strategies, risk management, and key appointments of the board
- Balance the interests of all stakeholders throughout the deliberation process
- Contribute to the succession planning for departing executive directors
- Define sensible remuneration levels for the company’s top executives and managers
- Ensure financial information is reported properly and that relevant controls are maintained
- Report any instances of unethical behavior, fraud, or violations of company policies
Skills and Traits of an Independent Director
As the business landscape grows in complexity and the need for organization-wide accountability increases, so too does the need for competence from your independent directors. Here are the most important characteristics that all outside directors should have:
- Strategic vision: To be a successful independent director, you need the ability to create a long-term strategic vision that provides a roadmap for the company’s decision-making. This requires directors to avoid getting obsessed with minute details and take a wider view of the company’s resources and the context of their industry before setting achievable ambitions.
- Objectivity: A key aspect of being a good independent director is, well, being independent. Executives in this position must provide an outside perspective that doesn’t blindly approve of prevailing stances in the boardroom. Non-executive directors are there to challenge other executives with tough, but fair questions and arguments. This ensures each decision is fully considered and the best idea wins.
- Industry expertise: Independent directors don’t have to know everything about the company’s industry and how it operates, but it’s always helpful to have a network of contacts that can bring you more information and insights about the business to develop better plans.
- Emotional intelligence: It’s important to analyze the machinations of your company and industry, but emotional intelligence is the trait that brings the boardroom together. Outside directors must get to know their fellow board members to better communicate with them while respecting their perspectives and opinions on topics.
- Ethical leadership: It’s on the leaders of the company to demonstrate that ethics and morals are important values that influence the way the organization does business and conducts itself. Independent directors must practice sound management principles and basic honesty with all shareholders and employees to verify that the company operates within legal guidelines.
- Diligence: Of course, it can be difficult to develop or maintain these skills at a high level. But the best outside directors find ways to perform their duties on a consistent basis with knowledge, hard work, and integrity.
Getting Started With OnBoard
Incorporating an independent board of directors into your management structure helps your company succeed. Board management software is designed to assist organizations and make their decision-making processes more efficient than ever. Digital platforms come with substantial features that make it easier for board members to collaborate, share information, and streamline work operations.
As a creator of our own board portal technology, OnBoard has plenty of expertise in this field and wants to help you make the right choice for your company’s needs. Our vendor comparison worksheet details what organizations should look for when evaluating potential software providers and gives you advice to make better assessments of each option’s suitability for your situation.
Navigate board software options wisely using our comprehensive vendor comparison tool.
Want to equip your board of directors with the tools they need to succeed? Request a free trial of OnBoard today.
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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