DEFINITION of 'Independent Outside Director'

An independent outside director is a member of a company's board of directors that the company brought in from outside (as opposed to an inside director chosen from within the organization). Because independent outside directors haven't worked with the company for a period of time (typically for at least the previous year), they aren't existing managers and do not have ties to the company's current way of doing business. Independent outside directors can bring new insights and balance to a team; however, some downsides also exist (read on below).

BREAKING DOWN 'Independent Outside Director'

The general consensus among stockholders is that independent directors improve the performance of a company through their objective view of the company's health and operations. At times independent outside directors can also bring specific expertise from their sector and/or personal experience. For example, a company specializing in health technologies might bring in an outside director with a prestigious medical background and degree to provide additional insight into the science behind their product(s).

An additional advantage of an independent outside director is that they do not have to worry about retaining their job within the company and can make their voices heard in a more objective manner (according to some). Stockholders and politicians pushed for more independent outside directors for large corporations in the wake of the Enron collapse in the early part of the 2000s. The consensus was that the lack of outside perspective and accountability masked many of the deep issues and false claims that were occurring and allowed to repeat within the company.

Independent Outside Direct Versus Inside Director

A company should have a balance of both outside and inside directors. While outside directors can provide valuable and distinct perspectives, inside directors have the advantage of knowing the company’s inner workings, culture, history, and issues that need solving in real-time. Inside directors can be current employees, officers or direct stakeholders in the company.

More specifically, they typically include a company's top executives, such as the chief operating officer (COO), the chief financial officer (CFO) and the chief operating officer (COO), and representatives of major shareholders and lenders lenders, such as institutional investors with sizable investments in the company. In this case, the majority shareholder will often insist on appointing one or more representatives to the company's board of directors.

As with outside directors, inside directors still have a fiduciary duty to the company and are expected to always act in the company’s best interests.

RELATED TERMS
  1. Inside Director

    An inside director is a board member who is an employee, officer ...
  2. Outside Director

    An outside director is a member of a company's board of directors ...
  3. Executive Director

    An executive director is the senior operating officer or manager ...
  4. Outside Sales

    Outside sales is the sale of products or services by sales personnel ...
  5. Interlocking Directorates

    A common business practice where a member of a company's board ...
  6. Corporate Governance

    Corporate governance is the structure of rules, practices and ...
Related Articles
  1. Investing

    The Basics of Corporate Structure

    CEOs, CFOs, presidents and vice presidents – learn how to tell the difference.
  2. Financial Advisor

    Fund Boards: What They Do and Why You Should Care

    Fund boards oversee management and operations of the fund on behalf of shareholders. Make sure you've got a board that will look out for you.
  3. Investing

    Evaluating the board of directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  4. Small Business

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  5. Managing Wealth

    3 reasons to separate CEO and chairman positions

    Separating the high-profile positions of chairman and CEO can help to strengthen the overall integrity of a company.
  6. Financial Advisor

    Asset Manager Ethics: Independence and Objectivity

    The best practices in maintaining independence and objectivity should be adopted by firms to protect investment professionals from pressure both from within and outside the firm.
  7. Financial Advisor

    Company Insiders Aren’t Buying Stock: Should You?

    Purchases of company stock by insiders is on the decline. Is this a warning sign?
  8. Investing

    Insiders Selling Nvidia Stock

    As insiders sell Nvidia, should shareholders be concerned?
  9. Investing

    Tesla and GM to Face Shareholders Today

    The futures of two of the nation’s biggest automakers could change today if some angry shareholders get their way.
RELATED FAQS
  1. What is the difference between a president and a CEO?

    In corporate governance and structure, the roles of both CEO and president often vary across firms. Read Answer >>
  2. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center