Inside vs. Outside Directors: What’s the Difference?
One of the crucial factors to consider when appointing a board of directors is balancing the numbers of outsiders and insiders on your board.
What exactly do “inside” and “outside” directors mean? Understanding their major differences is crucial when considering your board composition. Read on to learn more about the key differences and pros and cons between appointing inside and outside directors to your board of directors.
What is an Inside Director?
An inside director is a board member employed with the organization. Examples of inside directors include top executives who engage in the daily management of the company:
- Chief operating officer (COO)
- Chief financial officer (CFO)
- Chief executive officer (CEO)
Inside directors could also be major shareholders (or their representatives). Because they have direct ties to the company, they have access to inside information and the organization’s inner workings. This knowledge makes them a key element in an organization’s success and comes with a duty to act in the company’s and shareholders’ best interests.
Since inside directors access classified information, strict regulations apply to them regarding securities trading. They cannot trade on insider information that shouldn’t be public. Additionally, the self-interests related to their employment ties with the organization make insiders more vulnerable to conflicts of interest.
What is an Outside Director?
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.
Frequently Asked Questions (FAQ)
What are the Roles and Responsibilities of Inside and Outside Directors?
Inside directors participate in day-to-day management activities in the company, and provide company-specific insights to help the board make personalized decisions.
Outside directors offer external expertise to improve governance. They also oversee inside directors to enhance accountability on the board.
Is an Independent Director the Same as an Outside Director?
An outside board member is also called an independent or non-executive director. That's because they lack a material relationship with the company and don't participate in daily managerial activities.
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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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