Independent directors make up a majority of the board where the chairman is not independent.
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A director with no material relationship with a company Show
What is an Independent Director?An independent director, in corporate governance, refers to a member of a board of directors who does not have a material relationship with a company and is neither part of its executive team nor involved in the day-to-day operations of the company. Summary:
Independent Directors – A Requirement to List on a Stock ExchangeDepending on the stock exchange, there are requirements for the number of independent directors that must comprise the board. For example, the New York Stock Exchange (NYSE) requires that (independent) directors comprise the majority of the board. For this reason, understanding the definition of an independent director is important to avoid violating any rules. The NYSE’s and the NASDAQ’s respective definitions are as follows: NYSE: “Independent director” is one who the board “affirmatively determines” has no “materiality relationship” with the company “either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company.” NASDAQ: “Independent director” is one who is not an executive officer or employee of the company and who, in the board’s opinion, has no relationship which would “interfere with the exercise of independent judgment” in carrying out director responsibilities.” Although the NYSE and the NASDAQ define the term slightly differently, the underlying message is that an independent director must not have a material relationship with the company it boards or have a material relationship with a related company that conducts business with the company. A material relationship is a relationship that can interfere with the exercise of a director’s independent judgment. Potential Benefits of Appointing Independent DirectorsIndependent directors are generally desirable to be appointed to the board of directors and are key to good corporate governance. A board that is majority independent would be better suited to oversee the CEO as opposed to a board comprised of dependent directors. Additionally, appointing more independent directors generally results in greater third-party advice and expertise (due to the executives coming from different backgrounds). Since the directors, by definition, do not have a material relationship with the company, they are not subject to undue influence from the management team. Potential Drawbacks of Appointing Independent DirectorsIn addition to the potential benefits, there are a number of drawbacks to consider. One example is the risk of information asymmetry, as independent directors are generally less informed about the company than the management team. Although a director may be independent by definition, it does not imply that the director is acting in absolute independence – independent directors can be co-opted by management. In addition, they may not have the requisite skills and knowledge to be an effective board member. Board Independence for S&P CompaniesAs reported by the Wall Street Journal (WSJ), the vast majority of board members for S&P 500 companies are deemed independent under stock-exchange rules. The following is a graphic provided by the WSJ: Companies with a 100% independent boardThe three black circles in the graphic above refer to companies with an independent board of directors only. The three companies are McDonald’s, Kraft Heinz, and Transocean. Companies with a 50% or less independent boardCompanies with half, or less than half, of their board comprised of independent directors include News Corp, Urban Outfitters, Expedia, Essex Property Trust, Kinder Morgan, Brown-Forman, Fidelity National Information Services, Diamond Offshore Drilling, and Cablevision Systems. Additional ResourcesThank you for reading CFI’s guide to Independent Director. To keep learning and advancing your career, the following resources will be helpful:
What percentage of the board of directors should be independent directors?At least 50% of the board should have non-executive directors. If the chairman of the board is a non-executive director, then at least one-third of the board should comprise independent directors. If the chairman is an executive director, then independent directors should make up at least half of the board.
Why the majority of the board should be independent?Company boards should have an independent majority. An independent majority on the board is more likely to consider the best interests of shareowners first. It also is likely to foster independent decision-making and to mitigate conflicts of interest that may arise.
What is an independent chairman of the board?The independent chairperson can act as the main point of contact for shareholders and may assist to ensure objective board decisions, i.e. to ensure the board establishes a balance between the interests of management and the company's stakeholders (including shareholders).
How many independent directors should a board have Singapore?A company can also appoint independent directors. The listing rules currently require at least two directors on the board to be independent directors. With effect from 1 January 2022, the listing rules will require at least one-third of the board to comprise independent directors.
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