Outside Director

What is an 'Outside Director'

Any member of a company's board of directors who is not an employee or stakeholder in the company. Outside directors are paid an annual retainer fee in the form of cash, benefits and/or stock options. Corporate governance standards require public companies to have a certain number or percentage of outside directors on their boards as they are more likley to provide unbiased opinions.

Also referred to as a "non-executive director."

BREAKING DOWN 'Outside Director'

Outside directors are advantageous to the company because they have very little conflict of interest and may see the big picture differently than insiders. The downside is that since they are less involved with the companies they represent, they may have less information upon which to base their decisions and reduced incentives to perform. Also, outside directors can face out-of-pocket liability if a judgment or settlement occurs that is not completely covered by the company or its insurance. This occurred in class-action suits against Enron and WorldCom.

Board members with direct ties to the company are called "inside directors."