Independent Director

Independent directors provide oversight and challenge to management, helping protect the interests of all shareholders. To be considered independent, a director typically must not be a current or recent employee, have significant business relationships with the company, receive substantial payments beyond director fees, have close family ties to executives or represent a major shareholder. Serving on a board for a very long time may also be seen as affecting independence.

Corporate governance codes and stock exchange rules usually require a significant share of board members to be independent. In the United Kingdom, the governance code recommends that at least half the board, excluding the chair, should be independent non-executive directors. US stock exchanges require a majority of directors to be independent.

For example, an independent director might lead the audit committee, challenging management on accounting judgments without any personal stake in the answers.

Independence on paper does not guarantee independence in practice. Directors chosen by management or with social ties to executives may still be reluctant to challenge them, which is why boards also consider skills, experience and culture.