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Independent directors provide an unbiased perspective in policy development and planning for a company. They cannot be associated with the company or its majority shareholders and receive no compensation beyond fees for attending board meetings. They monitor activities, represent shareholders, and can serve as a public relations tool.
An independent director assists in policy development and planning for a company. Independent directors do not have personal relationships with the companies they work for and are believed to be less biased than managers who come from within a company or are closely connected with a company. Many companies have an independent director on their board in order to benefit from the input of an impartial adviser when making decisions about how to operate the company.
To be considered an independent director, someone must not work for or be associated with a company. This association extends to relatives and partners. Independent directors receive no compensation beyond their fees for attending board meetings and are not involved in the day-to-day management and operations of the company. They also cannot be majority shareholders or beneficiaries of persons who hold majority shares.
The independent director’s role is to provide an outside perspective. People in this position are sometimes referred to as outside directors in reference to their role on the board. Like other board members, an independent director should read financial reports, know the company and industry well, and avoid working with industry rivals to limit conflicts of interest. This board member participates in votes and discussions about the future direction of the company, including decisions on compensation and the adoption of new company policies.
Independent directors monitor activities at the companies they work for, identifying specific issues and areas of concern that the company needs to address. They also represent the interests of shareholders. Although shareholders vote on some issues, they are not involved in decision-making at the board level. Having a board member who champions and protects shareholders can be important and will help the company fulfill its fiduciary duty to people who own stock and have an interest in the company.
It’s also not uncommon to see a company using an independent director as a public relations tool. Companies can request notable community members to serve on the board. High-level people can serve on the boards of many companies and organizations, giving weight to procedures at board meetings. Having a famous and well-respected person on the management team can improve a company’s reputation and increase trust among investors and members of the general public.
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