Director FAQ: Director Independence

In brief: Directors are fiduciaries on behalf of the corporation and its owners (or, in a nonprofit organization, its beneficiaries). As fiduciaries, they must be free from conflicts of interest when they make decisions, recusing themselves if they have a conflict. In some situations, however, avoiding a conflict of interest is not enough; the director must also be considered “independent.” Director independence is defined variously, depending on context. This memo sets forth the most common definitions of director and board independence in public companies, investment companies, and nonprofit organizations.

This resource can help your board to

• review the purpose of director independence and consider its impact on board composition;
• become familiar with the director independence standards for the New York Stock Exchange and Nasdaq, as well as for investment funds and nonprofit organizations; and
• understand the Institutional Shareholder Services’ voting recommendations and its definition of director independence.

The most relevant audiences for this resource are board chairs, lead independent directors, and nominating and governance committee chairs.