What is an Outside Director?

An outside director refers to an independent director of a company who is not an employee of the company. A member of a company's board of directors who is not a stakeholder in the company and has no financial relationship with the company is an outside director. Outside directors are entitled to sitting fees or annual retainer fees that the company pays either in cash or in stock. As part of the regulations for companies, the board of directors must comprise a percentage of outside directors because these directors give independent and unbiased opinions about matters arising in a company when compared to inside directors that owe their allegiance to the companies.

What Does is an Outside Director Do?

An outside director is otherwise called a non-executive director. In the United States, there are certain corporate governance standards that stipulate that outside directors must be present on the board of directors of every company. In the U.S, about 66% of boards comprises outside or independent directors. There are many benefits of having outside directors on a company's board of directors, these include;

• Outside directors have outside and new perspectives on issues in a company.
• They give unbiased opinions which might not necessarily be in favor of the company.
• They have a minimal conflict of interests.

Despite the advantages outside directors bring to a company, there are some downsides of these directors such as lack of adequate incentive, insufficient information about the company, lack of access to classified information, among others.

Outside Directors and the Example of Enron

Outside directors play important roles in companies, this is why all companies must have a number of these directors on their boards. It is the duty of these directors to maintain their positions and also contribute to the growth and success of the company. Typically, outside directors help keep companies in check by performing oversight or checks and balances functions. In the case of Enron however, the outside directors of Enron derailed from their duties, enabling Andrew S. Fastow, a one time CEO of the company to enter shady deals that cause chaise for the firm. Outside directors faced out-of-pocket liability from the judgments and settlement that resulted from the deals.

Outside Directors and Corporate Governance

There are corporate governance standards and guidelines hat outside directors must adhere to, these guidelines will not only keep their companies in check but also help prevent frauds and shady deals by top executives or inside directors of the companies. Corporate governance contains clear policies that reduce risks and liabilities that a company and its directors are exposed to, these policies create a balance between the operations of a company and help in attaining its goals and objectives. It is essential that outside directors use corporate governance rules as measures of controlling their organizations.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition