Independent Director

They are not a part of the company's executive body but work to help the company grow.

Patrick Curtis

Reviewed by

Patrick Curtis

Expertise: Private Equity | Investment Banking


December 6, 2022

Independent directors are not a part of the company's executive body but work to help the company grow. They accomplish this by improving the company's credibility and government standards.

These directors play various roles for a company, such as being an advisor and guides in lessening the risks taken. Companies need IDs because they can endure and deal with any pressure owners put on the company.

There are many responsibilities they undertake, one being helping with succession planning. Succession planning plays a vital role in choosing an ideal candidate for the company witnessing a change in leadership when the current leader decides to retire or leave the company.

Succession planning takes a great deal of time and requires careful planning when making decisions. The company must consider many aspects about each candidate, for instance, their character, experience, skill sets, and how well they can lead others.

Independent directors can help to speed up this process as they support various individuals in the company and handle multiple essential tasks. In addition, they can use their knowledge to recommend ideal candidates for leadership positions.

Company Board

Strong leadership is a critical factor for a company and even more so for the board of the company, which represents the governing body of a company. Therefore, independent directors play a crucial role in evaluating the board's performance with an unbiased view.

There are various characteristics to look for in a well-established board:

  • Strong leadership
  • The ability to think strategically
  • How well organized their board meetings are
  • A panel with high levels of diversity
  • How well they manage their time
  • Having a committee possessing a solid structure
  • Conflict of interest
  • The ability to keep their egos in check

In board meetings, various matters discuss, for example, strategies to resolve issues and resources they have at their disposal. The board also discusses the company's performance and how well they manage the risks taken when deciding on its next course of action.

Companies arrange appropriate times for these meetings to discuss making other appointments and remind everyone of their standards. Directors consider all these matters to make their judgments during discussions.

Their review allows them to proceed on how to aid the company in achieving its goals.

Company Management

These directors are responsible for observing and making reports on the performance of management. The ones who manage the company also determine the future of the company and where it is headed.

Reports are necessary for the company to understand what is going on and the current situation. In addition, the information provided in reports allows the company to decide on the best course of action to guide its business in the right direction.

For this reason, IDs must review future strategies, planning, and goals to make accurate reports regarding management performance. In addition, various other factors should be considered when evaluating management performance.

One factor would be communication because the contact between managers and their employees gives an idea of how well the company is being managed. 

Communication is key to improving the company as employees have questions that need to be answered by the top executives and need assistance.

Strong relationships are formed through communication, which can improve the company's overall productivity. 

Another factor in analyzing management is doing a background check of top executives to have more information to help with ID assessments.

Management is key in allowing a company to remain stable and function properly. For this reason, independent managers are there to ensure proper management is occurring.

Independent managers oversee management, the board, and company performance. Stakeholders have separate responsibilities that directors must monitor. 

Company Stakeholders

Stakeholders take an interest in companies and can either influence or be influenced by the industry. The way they can control the company is by affecting their operations and the strategies they use, and the decisions they make.

Stakeholders hold a degree of influence over the organization, and not all do business with the company compared to customers who always do business with the industry. As a result, independent directors tend to balance stakeholders' conflicts of interest.

The reason is that each stakeholder has a different value in a corporation, and some are more important than others. 

Stakeholders with more excellent value are the ones with more enormous resources, power, and influence. Therefore, IDs need to understand the types and interests of stakeholders to aid their company better.

Stakeholders also have differing interests, as some favor one aspect of a business while others favor an entirely different part. 

For example, one stakeholder is inclined towards what goes on in the government, while the other holds more interest in the inner workings of a bank.

Several sectors have their stakeholders, with one being the government sector. The other sectors are the business and non-profit sectors, and IDs handle the protection of the stakeholder’s interests.

Independent managers ensure that risk management's financial aspects are in good condition. They also ensure that executives and other top members of the company are well compensated. 

Forms of Stakeholders

There are numerous examples of stakeholders, such as:

  • Customers
  • Suppliers
  • Shareholders
  • Banks
  • Employees
  • Competitors


Starting with customers and how each has their preference for what goods and services they want. If one company has products they want, then the customer will purchase that good, resulting in the company receiving revenue and customer satisfaction.


These are another form of stakeholders as the supply influences the company that acquires them. This is because the more supply the company gets, the more resources they have at its disposal, allowing it to proceed with plans it could not have before.


These can influence the company by making several changes that they feel are necessary to improve its performance. One example of this change is replacing some employees that are not meeting expectations with other workers.


Banks, in the form of creditors, influence a corporation through loans in the hope that they will have a greater profit return later. They offer money to industries in exchange for returns with interest added to the amount.


Employees influence the company's productivity and are compensated through salary and wage rates. The company influences employees by incentivizing them to work harder or leave if they are not satisfied with wages, for instance.


Finally, competitors influence a company's success through various strategies that deter success, motivating the company to think of better ways to achieve heights. However, competitors can play by the rules and perform any action outside the law if they want to see their rival company fail.

Free DCF Crash Course

Sign Up for our Free DCF Modeling Crash Course

Begin your journey into financial modeling with our free DCF Modeling Crash Course.

Learn More

Public vs. Government

The public is a significant stakeholder; they play a major role in companies and represent the company's employment. 

Companies require labor to function and improve their productivity as employees are people from the public hired by the company. As a stakeholder, the public differs from the government in how they affect companies.

Governments influence companies through rules and regulations that industries must follow. 

Companies depend on the government for several services, such as infrastructure, for example, the construction of more buildings. These buildings would help companies to expand their resources and employment.

Independent directors must look at all these different stakeholders and their preferences to balance conflicts of interest. There is a vast amount of information IDs must know to perform their duties for the company.

One of their duties is understanding and learning about the company and its functions. This is why these managers need to observe aspects of industries to obtain sufficient information to fulfill their duties.

ID needs to identify the different types of stakeholders that are part of the public which will be harder than identifying stakeholders in the company.

The public represents the company's external stakeholders as they still influence the company despite not being a part of it. Those in government are another example of external stakeholders, but the difference is how the government holds a greater influence than the public.

Duties of Independent Directors

IDs need to keep themselves updated with everything in their company. The reason is to allow them to help people in the company more effectively by staying updated with information. 

These directors also hone their skills and stay on top of what goes on in the company. Their responsibility is to attend various meetings, including general and board of director meetings, to learn about the company’s vital matters and current situation. 

Attending these meetings gives these managers information about the company's current state and direction. IDs also obtain knowledge of external influences on the corporation, such as banks and the government.

Knowledge of external influences on the company is essential to independent managers as it will help them protect the interests of the company and those within. 

IDs preserve the company's interests by not disclosing confidential information unless the board approves such disclosure.

Independent directors are also part of the board committee, allowing them to attend meetings without restrictions. Companies have tools that need to function for their use, which IDs need to handle to allow usage without significant consequences.

Rules and regulations must be followed to prevent damage to the company, which is why these directors observe matters to ensure no one is breaking the rules.

The company has a code of conduct and policy on ethics which set responsibilities and practices to stand by.

Company’s Code of Conduct and Ethics

Independent directors are responsible for reporting unethical behavior and actions that violate the company's code of conduct. Although they are responsible for reporting activities that break the rules, they are also responsible for obeying the code of conduct.

The code of conduct and ethics policy are influenced by the laws and regulations of the country set by the government. Therefore, the company needs to ensure that all its actions do not conflict with these laws and that its workers follow these protocols.

Companies set rules and regulations to prevent conflict and ensure current, and new workers become familiar with the rules. Rules allow for the company to perform ethical work within the perimeters of the laws and achieve success.

These directors are appointed by types of companies listed and unlisted companies, which select different amounts of IDs. The listed companies appoint about one-third of their directors as independent directors, while unlisted companies appoint the minimum.

Companies have many aspects that must be explored to indicate their relationship with their independent directors. IDs are not part of the company's governing body as they act independently. 

Companies select individuals for this role based on experience, skillset, and qualifications. These qualifications include considerable knowledge about the bank's workings and experience in other areas.


Independent directors provide aid to the company but are not directly part of the company. They handle the external aspects of the company and are not involved with internal matters the employees take. 

Companies select certain individuals with specific skills to act as independent directors. There are several qualities that the company looks for, which are experience and leadership skills.

IDs are brought into the company when their assistance is required for issues of great importance. These matters include decision-making, the progress of the company, and reports about external stakeholders such as the bank and the government. 

The ideas these directors provide can allow the industry to grow and continue to achieve success in the long run. IDs also protect the company from any matters that would cause harm, such as unethical activity and issues that violate rules. 

Corporations require independence in their governing body to deal with such threats to allow the executive body to invest more of their internal matter in their company. In addition, these directors can make judgments on issues using their knowledge and skills. 

Their judgment opens the door for more options that would allow growth in the company. This is essential as a company can discuss all these opinions during their meetings to make optimal decisions.


Sign Up for our 13-Week Cash Flow Modeling Course

To Help You Thrive in the Most Prestigious Jobs on Wall Street...

Learn More

Researched and authored by Anthony Kibwe 

Reviewed and edited by Parul Gupta LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: