Who is an Independent Director?
Independent Director refers to the member of the board who is not from the organization and helps share a neutral opinion as they are not attached to the existing management. Their primary role includes setting the remuneration of top executives, provide judgement related to corporate finance decisions and plays 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. He has several other associations before that. So, this is chosen as per experience and skill.
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For eg:
Source: Independent Director (wallstreetmojo.com)
Role of an Independent Director
- The most important role is to help in setting the remuneration of top executives of the company. It is a proven fact that top executives of listed companies are highly overpaid. So, this try to take a neutral decision regarding the correct pay structure
- They must provide a neutral judgment regarding important corporate finance decisions. He should always keep shareholders’ benefit in mind before giving his decision. Economic, social and governance (ESG) factors must also be kept in mind while taking 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 per sitting basis. The pay is also huge. So actually shareholders are paying money to get advice from experts. It is the duty their duty to stay updated all the time. They should constantly upgrade their skills, knowledge, etc
- This is to blow the whistle when he sees something unethical, fraud, or violation in the company. 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 current scenario of the company.
- Meetings shouldn’t be missed as they help to understand the inside of the company more deeply. So it is their duty to attend the meetings
Independent Director vs Non-Executive Director
- A Non-Executive director is a director who is not an employee of the organization. On the other hand, an Independent director is also not an employee of the organization but is bounded by several other requirements. They cannot hold shares of the organization. There is no such rule for Non-Executive director. So all Independent directors are Non-Executive but all Non-Executive directors are not independent.
Benefits
- It helps to guide the organization with his expertise and skill set that he has earned over the years.
- Serve as a middle man between the shareholders and management and helps in resolving 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 for several boards. So they tend to lose efficiency as they don’t get time to understand the structure of the company in detail and can’t 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 having proper knowledge of the circumstance tries to pass judgment, then it will be difficult for the management to run the company.
- Often it is seen that in difficult times, these directors quit as they don’t want to be involved in legal proceedings.
Conclusion
These are important for an organization. The Board of directors is the decision-maker and it requires both internal and external directors to maintain a proper balance and generate maximum return for the shareholders. Proper Due Diligence should be carried before the appointment.
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