An independent director. Who is it?
When are you truly independent of the company and/or other members of the board?
The following definition of a person who is an independent director on the board of an entity, is reproduced with consent from Ratings Afrika.
The term an independent director in our opinion is one who, in respect of a specific company:
- Has not held an executive position within the company group.
- Has not had an association with the company of more than nine years. at board level.
- Is not related through blood, marriage or equivalent relationship to other directors or advisers to the company.
- Has not been appointed as a director in a manner other than through an appropriately constituted nomination committee or equivalent independent process.
- Is not or has not recently (i.e. three years or less) been employed by, a partner in or on the board of, a professional adviser (including an adviser that renders other services also) to the company.
- Does not have employee status, hold share options or other conditional share awards, receive remuneration other than fees, receive consultancy payments or have eligibility for pension benefits or participate in bonus schemes.
- Does not receive remuneration from a third party in relation to the directorship.
- Does not benefit from related party transactions involving the company.
- An independent director does not have common or cross directorships or links with other directors of this company through involvement in other companies or bodies.
- Does not currently hold, nor has recently held, a senior position with a political or charitable body to which the company makes contributions either in cash, in kind or through sponsorship, etc.
- Does not beneficially own a significant holding (viewed to be 5% or less of voting shares, or 10% or less of non-voting shares) or serve as a director or employee of another company which has a significant holding in the company.
- Does not serve as a director or employee of another company in which the company has a significant holding.
- Is not or has not recently been employed by or on the board of a significant customer or supplier to the company. In this context “significant customer or supplier” is to be determined either by the criticality of the relationship to either of the two parties (customer/supplier to company) in strategic or operational sense, or by the financial significance of the gross trading amount (such as turnover) amounting to more than 10% of either party’s income or loss before tax.
- Does not act as the appointee or representative of a stakeholder group other than the shareholders as a whole.
- Does not serve as a director or employee of a significant competitor of the company. “Significant competitor” is viewed to be one that commands 20% or more of the market share in the market sector where the company is operating.
Several excellent articles on the subject can be found on the internet. Here are links to a few: