Board Independence

Overview

To be effective, boards must take steps, both in their structures and in their nominating procedures, to ensure that insiders and executive owners are unable to exercise undue control over the board’s activities and decisions.

CFA Institute Viewpoint

Company boards should have an independent majority. An independent majority on the board is more likely to consider the best interests of shareowners first. It also is likely to foster independent decision-making and to mitigate conflicts of interest that may arise.

Insiders as Independent Directors

  • Position: Current and former executives and directors of an issuer should not be permitted to sit as an independent non-executive directors until five years after leaving the relevant positions, and then only under certain restrictions.
  • Rationale: Insiders such as individuals from these groups can retain emotional, financial, professional, and personal ties to the issuer, its management, and its directors. This retained loyalty may compel the insider to decide on matters in a way that does not first serve the interests of shareowners. 

Independent Director’s Connection to the Company

  • Position: Independent non-executive directors should not have been connected to a director, chief executive, or substantial shareowner of the issuer within the preceding five years.
  • Rationale: Individuals with such links to insiders are more likely to make decisions on the basis of those links than on what is best for shareowners. After five years, the allegiance may diminish to a point where the independent, non-executive director may make decisions that run counter to the interests of the insider. 

 

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