An Independent director (also sometimes known as an outside director) is a director (member) of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. Independent Directors do not own shares in the company. (Some sources state non-executive directors are different from independent ones in that non-executive director are allowed to hold shares in the firm while independent directors are not. In the US, independent outsiders make up 66% of all boards and 72% of S&P 500 company boards, according to The Wall Street Journal.
The NYSE and Nasdaq stock exchange standards for independent directors are similar. Both require that "a majority of the board of directors of a listed company be 'independent,'" Both allow compensation for directors of $120,000/year or less (as of August 2008).
The NYSE states:
"no director qualifies as 'independent' unless the board of directors affirmatively determines that the director has 'no material relationship' with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company."
Nasdaq's rules say that an independent director must not be an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
In India as of 2004, a majority of the minimum seven directors of public companies having share capital in excess of Rs. 50 million (Rs 50,000,000) should be independent. Clause 49 of the listing agreements defines independent directors as follows:
"For the purpose of this clause the expression 'independent directors' means directors who apart from receiving director's remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in judgment of the board may affect independence of judgment of the directors."
Maximum compensation or "sitting fee" as of 2004 was Rs. 20,000/-.
Some researchers have complained that firms have appointed "independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions."
One complaint against the independence regulations is that CEOs may find loopholes to influence directors. While the NYSE has a $1 million limit on business dealing between directors and the firm, this does not include charitable contributions. Two critics of management influence over boards note that "a director who is an officer or employee of a charitable organization can still be considered independent even if the firm on whose board the director sits contributes more than $1 million to that organization."
- Are we making a mockery of independent directors? Dr. Madhav Mehra, President, World Council for Corporate Governance (circa 2004)
- Corporate Governance on an International Level, Tamkeen, 2010
- SEC Approves NYSE and NASDAQ Proposals Relating to Director Independence| corporate.findlaw.com| 2008-03-26
- Client Alert. Nasdaq and NYSE Amend Definition of Independent Director| Chadbourne & Parke| 5 September 2008
- Just What is an Independent Director Anyway? Governance Center Blog, The Conference Board
- Hiring Cheerleaders: Board Appointments of "Independent" Directors Lauren Cohen, Andrea Frazzini Christopher J. Malloy
- Pay Without Performance: The Unfulfilled Promise of Executive Compensation By Lucian Arye Bebchuk, Jesse M. Fried] (p.29)
- The Role of Independent Directors After Sarbanes-Oxley, By Bruce F. Dravis