Outside Director – Definition

Cite this article as:"Outside Director – Definition," in The Business Professor, updated December 2, 2019, last accessed October 22, 2020, https://thebusinessprofessor.com/lesson/outside-director-definition/.


Outside Director Definition

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.

A Little More on What is an Outside Director

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.

References for “Outside Director

https://www.investopedia.com › Investing › Investing Strategy





Was this article helpful?