Glossary term
Independent Director
Subject: Governance, Corporate Governance
Also known as: Independent Non-Executive Director, Board Independence
An independent director is a board member with no significant ties to the company, its management or its major shareholders that could colour their view, so they can oversee and challenge impartially.
Explanation
Codes and listing rules define independence through tests. Common disqualifiers are being a recent employee, receiving other pay from the company beyond director fees, close family links to executives, holding a large shareholding, serving for many years, or working for a major supplier, customer or adviser. Rules differ between countries, so the same person may count as independent in one market and not in another. Board independence is the share of such directors on the board and on key committees. Codes usually ask for a minimum proportion, and for audit and remuneration committees to be mostly or entirely independent. Independence is also a state of mind, since formal tests cannot show whether a director will in fact speak up. Confidence among outside investors that the board is not run only for insiders depends partly on this role.
Example
A listed retailer wants to count a retired partner of its law firm as an independent director. The nomination committee notes that the firm still earns fees from the company and that the director left only a year ago. It decides she cannot be classed as independent for the audit committee, and looks for a candidate without such ties.
Not to be confused with
- Non-Executive Director (NED)
- A non-executive director is simply not in management. Independence also requires the absence of ties that could compromise their view.