A member of the Board of Directors who has either never been employed by the company or who has not been employed with the company for at least a year or so. Also known as an “outside director.” When a Board of Director’s seat is filled by an existing employee of the Board’s corporation, that individual is considered an “inside director.”
Just as inside directors do, independent directors are governed by a fiduciary duty to act in the best interests of a corporation and its stockholders. Yet, even though both independent and inside directors are bound by the same duty, there are some differences between them. Independent directors serve as “fresh eyes” on a board, as they have not been recently tied to the ways in which the corporation does business. They may therefore be able to objectively spot weaknesses and strengths in a company’s operations that an inside director could not. Their independent background may also allow them to have less biased relationships with other company stakeholders. As a result, minority voices may have a more significant chance of being heard than they would if a member of an “old boys club” had taken the seat on the Board.
With that said, inside directors may possess valuable institutional memory, a strong sense of a corporation’s culture and can “hit the ground running” without having to spend time learning how a company operates. In the end, companies can benefit from having both independent and inside directors.
Employee One: “I hear that the vacant Board seat has been filled by doctor, not an ordinary business executive.”
Employee Two: “That’s great. This company needs to shake things up and an independent director might help to ensure that gets done.”