An inside director is a member of a company's board of directors who is also a member of the company's management or a major shareholder in the company. This level of interest in the operating affairs of the company can create a conflict of interest and as a result very high standards of care are applied to inside directors. Other members of the board, as well as shareholders and regulators, may keep a close eye on an inside director to confirm that she is not acting against the interests of the company.
A common example of an inside director is a chief executive officer who also sits on the board of the company. As a member of management, the chief executive officer must make decisions that will benefit the company and is involved in the day-to-day management of the company. As a member of the board, however, the inside director is required to look out for the interests of the shareholders by making decisions which will increase profits. Often, these two needs dovetail, because when a company is doing well, the shareholders benefit. However, there may be situations where the management and the board come into conflict, which can put an inside director in an uncomfortable position.
Major shareholders can also be inside directors. There can be a conflict of interest in these cases as a major shareholder obviously has an interest in keeping those shares valuable. Looking out for one's own interests will usually benefit the other shareholders. However, sometimes a major shareholder may be involved in a board decision that could harm some shareholders and benefit others.
The inside director is responsible for shaping the direction of the company while representing the interests of people who hold shares in the company. As a member of the board, the inside director meets when the board is convened and is involved in making proposals and voting on matters of concern to the board.
This contrasts with an outside director. Outside directors are people who are selected from the outside community to serve on the board of directors. They are not members of management, so they do not experience conflicts of interest from that quarter when they may decisions. In addition, they are not major shareholders, so there is no risk of a conflict of interest. Outside directors are connected to the company solely through the board, only have responsibilities to the board, and are compensated based on their performance as board members.
