The Evolving Meaning of “Independence” in the Board Room

The SEC and the stock exchanges have rules requiring minimum levels of independence for board members in respect to certain acts of governance. There are state rules as well, and proxy advisory firms maintain their own guidelines.

Although the NASDAQ and NYSE independence standards vary, there are a few common themes. The NYSE asks whether a director has a material relationship with the listed company. The NASDAQ asks a similar question. Both offer a list of factors, with substantial overlap, that automatically makes a director not independent. Although the thresholds differ, both exchanges also inquire into as to whether a director or a member of the director’s family has a relationship with a company that had a material relationship with the registrant corporation. Both exchanges generally require that boards be majority independent, and that the audit, nominating and compensation committees be made up solely of independent directors.

The most important state law is Delaware’s, which is built around the idea that judges ordinarily should not second guess the good faith business judgment of business people. Its courts are not, however, solicitous of judgments where there is conflict of interest.

Proxy advisors like ISS and Glass Lewis maintain their own standards of evaluation. They do not have a common standard, but both advisors have propounded tighter requirements than the NASDAQ and NYSE mandates, including with respect to business transactions with the registered company and past employment with the company or related entities.