An independent director refers to an individual serving on the board of directors of a company with which they have no material relationship. Independent directors are vital to ensure good corporate governance and the protection of shareholder interests. They are sometimes referred to as non-executive directors.
Some jurisdictions have requirements for the proportion of independent directors on boards, whether that is a majority, half or another proportion of the total number of directors.
Criteria for independence
While hiring an independent director, it is crucial to ensure that they have no ties to the company. They must not have any relationship with the organisation, either directly or as a shareholder, partner or officer of an associated company.
Reasons to have independent directors
Here are some reasons why it is important to have independent directors on your board:
A majority independent board of directors is better suited to assess CEO performance from an unbiased point of view. Since they have no material relationship to the company, they are not subject to influence from upper management or other internal parties.
Resolve conflicts of interest
With their detachment from the company, non-executive directors are best suited to handle conflict of interest disputes and prevent executive directors from acting on their personal interests that may be to the detriment of the company.
Broader input for decision-making
Independent directors come from different backgrounds and have extensive expertise in their field. A majority independent board brings diverse and fresh perspectives to important business decisions.
Enhanced transparency and accountability
The presence of independent directors is critical to ensure transparency and board accountability. They oversee management decisions and overall board performance as a third party, ensuring the company’s reputation is protected at all times.
Role of an independent director
An independent director must ensure that the company operates legally and ethically. Their primary duties include establishing executive director remuneration, evaluating corporate finance decisions, preserving the interests of stakeholders and actively participating in succession planning.
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