Who is an Independent Director?

An independent director refers to the board member, not the organization, and helps share a neutral opinion as they are not attached to the existing management. Their primary role includes: –

  • Setting top executives’ remuneration.Providing judgment related to corporate finance decisions.Playing a key role in controlling conflict between two parties.

Example

Robert M. Kimmitt has served as the lead independent Director for Facebook since March 2020. Before this, Kimmitt has served in several crucial roles, such as Senior International Counsel at Wilmer Cutler Pickering Hale and Dorr LLP, since April 2009. In addition, he had several other associations before that. So, this is chosen as per experience and skill.

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Role of an Independent Director

  • The most important role is to help set the remuneration of top company executives. It is proven that chief executives of listed companies are highly overpaid. So, this tries to take a neutral decision regarding the correct pay structure.

  • They must provide an unbiased judgment regarding important corporate finance decisions. Also, they should always keep shareholders’ benefits in mind before deciding. Economic, Social, and Governance (ESG) factors must also be considered while making decisions.Act as a middle person between the management and the shareholders. Play an active role in controlling conflicts between the two parties.

Duties

  • Independent directors are paid on a sitting basis. The pay is also huge. So actually, shareholders are spending money to get advice from experts. They must stay updated all the time. They should constantly upgrade their skills, knowledge, etc.That is to blow the whistle when he sees something unethical, fraudulent, or a company violation. He is working for the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more and should always continue to do so.They must meet outside separately, without the presence of management, to discuss the company’s current scenario.They should not miss meetings as they help understand the companies inside more deeply. So, they must attend the meetings.

Independent Director vs Non-Executive Director

A  Non-Executive Director Non-Executive DirectorThe non-executive director (NED) is an external member of the company’s board of directors appointed through a letter of appointment and they represents the shareholders interest.read more is a director who is not an organization employee. On the other hand, an independent director is not an organization’s employee but is bound by several other requirements. For example, they cannot hold shares of the organization. However, there is no such rule for non-executive directors. So, all independent directors are non-executive, but all non-executive directors are not separate.

Benefits

  • It helps guide the organization with the expertise and skill set he has earned over the years.Serve as a middle man between the shareholders and management and help resolve conflicts.Keeps the remuneration of the top-level executives as per the industry standards.It also acts as an external auditor and tries to find accounting frauds, if any.

Drawbacks

  • Often, it is seen that these directors serve as members of several boards. So, they tend to lose efficiency as they do not get time to understand the company’s structure in detail and cannot make an informed decision.Internal management is more aware of the employees of the company and the related parties. So, if an independent director without proper knowledge of the circumstances tries to pass judgment, it will be difficult for the management to run the company.Often, it is seen that in difficult times, these directors quit as they do not want to be involved in legal proceedings.

Conclusion

These are important for an organization. The Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more is the decision-maker. It requires internal and external directors to maintain a proper balance and generate maximum shareholder returns. Therefore, they should carry out appropriate due diligence before the appointment.

This article is a guide to Independent Director meaning. We discuss the independent director requirement, duties, examples, benefits, and drawbacks. You can also learn more about it from the following articles: –

  • CEO vs Managing DirectorDirector vs Executive DirectorShareholder RightsAgency ProblemTypes of Credit