What is an independent board director and what do they do?

Independent board directors are known worldwide by different names and titles, including non-executive directors, trustees, outside directors, and external directors. Essentially, they all refer to board members who have no material connection to the organization, are not part of the executive team, and are not involved in the organization’s day-to-day operations. In most countries, this independence is considered vital to good corporate governance.

Executive board director VS independent board director

Most boards will comprise the chair, executive, and independent directors. The total number of board seats and the ratio of executive vs independent directors will vary by country, the type and size of the organization, the industries they operate, public vs private company legislation, and the level of governance required. 

When it comes to publicly traded companies, the % of independent seats on a board ranges from 22% in Chile to 95% in the USA of independent directors. Many countries require a minimum of 50% independent board members for publicly listed companies. Family-owned businesses usually have a few independent directors, while state-owned organizations responsible for public funds and services have a high proportion of independent board directors.

So, what is the difference between independent and executive directors? They are essentially not employees and aren’t involved in the day-to-day running of the organization like a CEO, COO, or CFO. An independent director should have no conflicts of interest, including financial or personal relationships, business relationships, or other direct or indirect professional advisory roles. Their actions, judgment, and/or decision-making must always be unbiased.

Why are independent directors incorporated into boards?

There are many reasons why boards should or must include independent directors.

These include:

• • for good governance
  • for accountability
  • to provide alternative perspectives
  • having no material relationship with the organization
  • they are not subjected to undue influence from the executive management team
  • to bolster critical skills and expertise lacking in the executive management team
  • to shore up the organization’s reputation
  • to provide access to advantageous networking opportunities

Independent and Executive Directors have one significant thing in common: they are all equally liable for the organization’s actions. In most countries and jurisdictions, there is no legal distinction between executive and independent directors. Directors sitting on the same board all have the same fiduciary duties, responsibilities, and potential liabilities.

Responsibilities of the board and independent directors

The board of directors’ responsibilities will also vary somewhat by country, the type of organization and board, the industries and the level of governance required; however,  several key responsibilities are fairly common.

These include:

• • The organization’s performance – the buck ends with the board of directors and the strategies they implement or support.
  • Management successes – for all key senior management and director roles.
  • Compliance – to ensure that the organization meets all its regulatory obligations, whether structural, behavioural or financial.
  • Risk management – to understand the organization’s financial, operational, cultural and reputational risks and ensure that all necessary measures are taken to mitigate those risks.
  • Reputation management: understand and ensure communication of all organizational decisions and actions. 
  • Culture and social impact – drive a clear direction for the internal and external company culture, including the organization’s social and environmental impact.

Drawbacks to consider when becoming an independent board director

Now that you are clear about wanting to become an independent board director, there are some drawbacks that independent board directors may experience. You should take them into consideration. 

Unlike executive members of the board, your role is not only independent but supplementary to your executive role(s). The consequences here are two-fold, particularly during the first year of your appointment. Because you are not involved in the day-to-day management of the business, you will have a substantial time commitment to get up to speed with the complexities of the organization. This is on top of your day job commitments and may impact your executive career and personal life.

Independent directors are not part of the executive management team. If the executive team is tight (which is often the case), then independent directors may find themselves being treated as outsiders. This can be challenging, impacting their performance and ability to add value. New directors may not have the skills, leadership style or confidence to deal with the dynamics and politics of this environment.

Many independent board directors fail to consider travel commitments when performing the role. Even in this post-COVID era, most chairs prefer their boards to meet in person at least 4 to 6 times a year. On top of the time for the meeting, you also need to block out travel time to and from the meetings in your schedule. Then there are those emergency board meetings and last-minute public engagements you can never plan for.

Tenure restrictions are another factor for consideration. To ensure that independent directors remain independent, many jurisdictions and organizations limit the number of terms one can serve. An independent board director is often no longer considered independent after serving 3 to 4 terms. If a major reason for you becoming an independent director is to supplement income, then you need to factor in the tenure periods and plan ahead to secure your next paying board role.

The next step

You should now clearly understand independent directors and their work. If you want to know more about how to plan a board career and gain a role as an independent board director, attend one of my free board career information sessions.

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