An independent director is a person who has no role in the ownership, management, and decision-making of the company.
An Independent director brings to the table that unique and impartial viewpoint that enhances corporate credibility and governance standards of a company.
Without bias, an independent director upholds the interests of shareholders, employees, customers, regulators, and the entire organization.
The independence of the director that results in making informed decisions should not be impacted by either internal or external factors.
Role of independent directors
Independent directors provide independent oversight and constructive challenge or feedback to the management proposals without being influenced by either internal or external factors.
The constructive challenge should be positive but not always with the aim of overall improvement of the decision-making process. Independent directors have to ask those difficult questions that their counterparts the executive directors may fear to ask.
The existence of independent directors who ask difficult questions forces management to take extra care in preparing quality board papers that are aligned with the strategy.
The breakdown of the roles of independent directors includes the following among others;
- Act as a sounding board for management ideas and decisions;
- Improve corporate credibility and governance standards;
- Function as a watchdog of the company for ethical and legal risks;
- Maintain a balance in a shareholder and management-dominated situation;
- Ensure continuous existence of robust risk management;
- Fix the remuneration of the executive management;
- Appoint executive management members;
- Provide expert advice in areas of their competence and
- Consider emerging issues in the area of governance.
Challenges facing independent directors
It is important to note that independent directors do not have any role in the day-to-day management and decision-making of the company and therefore do not have direct access to company information. They only get access to update and correct company information through the management team hence the need to establish effective communication channels between the board and management team. Effective communication channels will help reduce the following challenges;
- The independent directors do not have a dedicated team hence they rely on management to provide them with updates and correct information;
- They are not in control hence the challenge of being trusted with confidential information;
- The opinion of the independent directors may conflict with the stand of management;
- The lack of adequate information may compromise their objectivity;
- Management may take the constructive criticism as an attack on them that often results in a defensive response;
- There could be also inferiority and superiority challenges between the board and management;
- Challenge of not accessing the same quality of information and;
- Protection of minorities in a company that may not be a priority for management.
Certainly, independent directors play an important role in protecting the interests of various stakeholders. They enhance company governance, oversight, and decision-making processes that result in the overall achievement of the goals of the company.