What Makes A Director “Independent”?

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What makes a director “independent”? That question is important, not only to investors who want to ensure that boards of directors exercise objective judgment on corporate affairs, but also to companies, who need assurance that their boards will not run afoul of exchange listing requirements, and to directors themselves, for protection against shareholder lawsuits challenging board decisions.

Listing requirements for both the New York Stock Exchange  and NASDAQ provide basic checklists for directors independence, and state generally that directors cannot be employed by the company, cannot have family members who are employed by the company and cannot have a controlling interest in the company’s substantial business partners. But the exchanges’ listing requirements also contemplate that the question of independence is far broader than any checklist. The NYSE’s listing requirements further note that directors should have “no material relationship” with the Company; NASDAQ’S requirements state directors should have no relationship which “would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”

Of course, what constitutes a “material relationship” or a relationship that “would interfere with the exercise of independent judgment” is inherently a fact-based question, and as such there are no bright-line rules to guide director retention. When evaluating director independence, factors that courts have considered include:

Close business or personal ties with other directors, controlling shareholders or third-parties with which the company does business;

  • Ownership of Company stock;
  • Service on multiple boards;
  • Personal interests in company business deals, whether past or current;
  • Excessive director compensation;
  • Political affiliations;
  • Other factors that could be said influence the director’s decision-making.

At bottom, the question of whether a director is independent must be evaluated on a case-by-case basis, and should involve careful consideration of the director’s background, business history and personal relationships.

 

Topics:  Directors, Nasdaq, NYSE, Shareholders

Published In: Business Organization Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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