Question

What is an independent director and how does this differ from a non-executive director?What are the advantages of independent directors?

Answer 1

Meaning of independent director:

Independent directors are non-executive directors or non-employee directors, who other than receiving director’s remuneration do not have any other material or pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries. They do not hold any the position of a key managerial personnel.

Difference between independent and non-executive directiors

All independent directors are non-executive directors but all non-executive directors are not independent directors.

A non-executive director may be a member of the company and can hold any number of its shares without any restriction, but an independent director may not be allowed to hold the share capital of the company beyond a certain limit.

Anon-executive director is allowed to monitor the executive activity and contribute to the development of strategy, but an independent are not allowed to make any sort of contribution.

Advantages of independent director:

• They help the company in improving corporate credibility and governance standards.
• They are assumed to a person of integrity and possesses relevant expertise and experience. So they are selected to provide specialist skills.
• They can help negotiate solutions to the competing interests minority and majority shareholders.