Independent Director
A board member with no material ties to the company, providing objective governance oversight.
What is Independent Director?
An independent director is a board member who has no material financial, professional, or personal relationship with the company beyond their role as a director. This means they are not current or recent employees, have no significant business dealings with the company, have no family connections to management, and receive no compensation from the company beyond director fees and equity grants. NYSE Rule 303A and Nasdaq Rule 5605 require a majority of board directors to be independent, and that audit, compensation, and nominating/governance committees consist entirely of independent directors. Independent directors are expected to provide objective oversight of management and protect the interests of all shareholders.
Example
Following the Enron and WorldCom scandals, the Sarbanes-Oxley Act of 2002 mandated that all members of the audit committee of a public company be independent directors, and prohibited audit committee members from accepting any consulting or advisory fees from the company beyond their director compensation.