An independent director aids in the development of a company’s policy and planning. Independent directors have no personal ties to the companies for which they work, and they are thought to be less biased than management personnel who come from within or are closely associated with a company. Many companies have an independent director on their board of directors so that they can benefit from the advice of a neutral advisor when making decisions about how to run the business.
Someone must not work for or be affiliated with a company in order to be considered an independent director. This bond extends to family members and partners. Independent directors are not compensated for their participation in board meetings and are not involved in the company’s day-to-day management and operations. They also can’t be majority shareholders or beneficiaries of majority shareholders.
The independent director’s job is to bring a fresh perspective to the table. Because of their role on the board, people in this position are sometimes referred to as outside directors. An independent director, like other members of the board, must read financial reports, be well-versed in the company and industry, and avoid working with competitors to avoid conflicts of interest. This board member participates in votes and discussions about the company’s future direction, including compensation decisions and the adoption of new company policies.
Independent directors keep a close eye on the activities of the companies for which they work, identifying specific issues and concerns that the company should address. They also represent the shareholders’ interests. While shareholders are given a vote on some issues, they are not involved in board decision-making. A board member who advocates for and protects shareholders can be beneficial to a company’s ability to fulfill its fiduciary duty to those who own shares and have an interest in it.
It’s also not uncommon for a company to use an independent director as a public relations strategy. Companies may appoint prominent members of the community to their boards of directors. High-profile individuals can serve on the boards of a variety of companies and organizations, lending credibility to board meetings. Having a well-known and respected figure on the management team can help a company’s reputation and boost confidence among investors and the general public.