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