Companies are required to have a number of independent or outside directors in their BoD given that these directors make unbiased decisions and bring fresh perspectives to the company. When included in a company's board of directors, independent outside directors bring balance. These directors have clear minds and new insights when it comes to decision making. This is why independent outside directors must not have any material or pecuniary relationship with the company or its associates.
Objectivity is a core quality of independent outside directors, with this, they enhance improved health and outlook of the company. Oftentimes, independent directors are experts in their chosen fields and they positively impact a company.
Shareholders of companies began to intensely push for the inclusion of independent outside directors in companies boards in the early s. In the U. There are many benefits of having outside directors on a company's board of directors, these include;. 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 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. 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. Written by Jason Gordon Updated at September 25th, Contact Us If you still have questions or prefer to get help directly from an agent, please submit a request. Please fill out the contact form below and we will reply as soon as possible.
Academic Research Corporate governance and the role of non - executive directors in large UK companies: an empirical study , Pass, C. Corporate Governance: The international journal of business in society , 4 2 , This paper studies corporate governance structures in the UK and scrutinizes the role played by non-executive directors in fostering best business practices. The Higgs Committee was appointed to reevaluate the role of non-executive directors as a measure to determine whether companies were still conforming to best practice recommendations and if financial irregularities were taking place.
The contribution of non - executive directors to the effectiveness of corporate governance , Clarke, T. Career Development International , 3 3 , This paper scrutinizes the role of non-executive directors while emphasizing that it is in a companys best interest to have outsiders in its board of directors. It also argues that shareholders cannot be considered viable counterforces to limit misuse of power by the board of directors.
Finally, the paper reiterates the need to induct non-executive directors that add value to the business. Board leadership, outside directors ' expertise and voluntary corporate disclosures , Gul, F. In this case, the majority shareholder will often insist on appointing one or more representatives to the company's board of directors.
Outside directors have an important responsibility to uphold their positions with integrity and protect and help grow shareholder wealth. Fastow to enter into deals that created a significant conflict of interest with shareholders as he concocted a plan to make the company appear to be on solid financial footing, despite the fact that many of its subsidiaries were losing money.
Corporate governance is a comprehensive system of rules that control and direct a company. These protocols balance the interests of a company's many stakeholders, including shareholders, management, customers, suppliers, financiers, government, and the community. They also help a company attain its objectives, offering action plans and internal controls for performance measurement and corporate disclosure.
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What Is an Independent Outside Director? Key Takeaways Independent outside directors are members of a firm's board of directors who are unaffiliated with the company itself. In contrast to insiders, outside directors are thought to be more objective and bring a different perspective to the management of a firm.
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