Director Independence

Independence of mind ranks as one of the most important personal characteristics a director can bring to board service. As fiduciaries, directors must be free from conflicts of interest when they make decisions, recusing themselves from voting (and, under some policies, discussing) matters where they have a personal stake. In some situations, however—such as serving on a key board committee at a public company—merely avoiding a conflict of interest is not enough; the director must also qualify as “independent.” Various regulatory bodies, stock exchanges, and corporate governance codes around the world have established guidelines and standards for determining director independence.  

Purpose of Director Independence

In combination with other characteristics such as intellect and integrity, independence of mind can provide objective viewpoints and oversight, help to safeguard stakeholders’ interests, enable sound decisions, and ultimately, contribute to the credibility of the company’s governance structure. For example, NACD’s own corporate governance guidelines state that the NACD board seeks “members with . . . solid business judgment, a continuous-improvement orientation, and an independent mindset.” Similar language about independence appears in many public company proxy statements.  

Director independence is defined variously, depending on context. In the United States, as in other countries, standards for director independence generally require that independent directors have no connections (beyond their director roles) to the organization’s management. Such independence is deemed necessary because directors represent shareholders and/or other stakeholders (e.g. for mutual funds, customers; for nonprofit organizations, beneficiaries). Director independence can also mean that the director is not affiliated with major shareholders or vendors, does not have immediate family members who work for the company, and does not receive funds from the company other than director fees.