Definition of an Independent Director

Council of Institutional Investors


An independent director is someone whose only nontrivial connection to the corporation is that person's directorship.

A director will not generally be considered independent if he or she:

EXPLANATORY NOTES

NOTES: Independent directors do not invariably share a single set of qualities that are not shared by non-independent directors. Consequently no clear rule can unerringly describe and distinguish independent directors. However, members of the Council of Institutional Investors believe that the promulgation of a narrowly drawn definition of an independent director (coupled with a policy specifying that a majority of board members should meet this standard), is in the corporation's and all shareholders' on-going financial interest because:

Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation. The definition approved by members of the Council contains this basic formulation. It then adds to it a list of the relationships members believe pose the greatest threat to a director's independence. The existence of any such relationship will remove a director from the independent category. Relationships not described in this list will not be considered in assessing independence.

The following notes are supplied to give added clarity and guidance in interpreting the specified relationships.

(a)
has been employed by the corporation or an affiliate in an executive capacity

NOTES: The term "executive capacity" includes the chief executive, operating, financial, legal, and accounting officers of a company. This includes the president, treasurer, secretary, controller, and any vice-president who is in charge of a principal business unit, division, or function (such as sales, administration, or finance) or performs a major policymaking function for the corporation.

An "affiliate" relationship is established if one entity either alone or pursuant to an arrangement with one or more other persons, owns or has the power to vote more than 25 percent of the equity interest in another, unless some other person, either alone or pursuant to an arrangement with one or more other persons, owns or has the power to vote a greater percentage of the equity interest. For these purposes, equal joint venture partners meet the definition of an affiliate, and officers and employees of equal joint venture enterprises are considered affiliated.

Affiliates include predecessor companies. A "predecessor" of the corporation is a corporation that within the last ten years represented more than 80 percent of the corporation's sales or assets when such predecessor became part of the corporation. Recent merger partners are also considered predecessors. A recent merger partner is a corporation that directly or indirectly became part of the corporation or a predecessor within the last ten years and represented more than 50 percent of the corporation's or predecessor's sales or assets at the time of the merger.

A subsidiary is an affiliate if it is at least 80% owned by the corporation and accounts for 25% of the corporation's consolidated sales or assets.

(b)
is an employee or owner of a firm that is one of the corporation's or its affiliate's paid advisers or consultants;

NOTES: Advisors or consultants include, but are not limited to, law firms, accountants, insurance companies, and banks.

(c)
is employed by a significant customer or supplier;

NOTES: A director shall be deemed to be employed by a significant customer or supplier if the director:

(d)
has a personal services contract with the corporation or one of its affiliates;

NOTES: The Council members believe that even small personal services contracts, no matter how formulated, can threaten a director's complete independence. This includes any arrangement under which the director borrows or lends money to the corporation at rates better (for the director) than those available to normal customers -- even if no other services from the director are specified in connection with this relationship.

(e)
is employed by a foundation or university that receives significant grants or endowments from the corporation or one of its affiliates;

NOTES: This relationship includes that of any director who is a salaried executive of a non-profit organization to which the corporation or its affiliate gives more than $100,000 or 1% of total annual donations received (whichever is less), or who is a direct beneficiary of any donations to such an organization.

(f)
is a relative of an executive of the corporation or one of its affiliates;

NOTES: Relatives include spouses, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, aunts, uncles, nieces, nephews, and first cousins. Executives include those serving in an "executive capacity."

Adopted 4/5/91


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