Director Independence
A governance standard requiring directors to have no material ties that could impair their judgment.
What is Director Independence?
Director independence is a corporate governance standard requiring that designated board members have no material relationship with the company that could compromise their objectivity. NYSE Rule 303A and Nasdaq Rule 5605 define independence criteria and require that a majority of directors be independent. Independence assessments look back five years and evaluate prior employment, compensation beyond director fees, family relationships with management, and significant business dealings with the company. The SEC requires companies to disclose independence determinations in annual proxy statements. Independent directors are mandatory for the audit, compensation, and nominating/governance committees.
Example
The SEC requires that all members of a public company's audit committee qualify as independent under both exchange listing standards and the additional stricter requirements of SEC Rule 10A-3, which prohibit audit committee members from accepting consulting fees from the company or being affiliated with a company that provides services to the audited company.
Source: SEC Rule 10A-3 — Independence of Audit Committee Members