2.4 Multitude of independence definitions

This section continues with the person building block of independence by giving an overview of the different underlying concepts of the definitions of independence. These definitions have developed over time and are outlined by Gordon for the United States (2007: 1478-1483). The earliest definition only focused on employment; such an independent director was characterised as somebody with no prior or current relationship with the company other than his position as director on the board. Those people were marked as outsider instead of independent director. Thereafter, a distinction was made between management directors and non-management directors. Current or prior employees were considered to be management directors. As a second layer, the non-management directors were split up in affiliated and non-affiliated. Affiliated non-management directors possessed a certain tie to the company, either of a personal or economic nature, which might be a hindrance for independent judgement. Examples of such relationships are bankers, lawyers and other suppliers of services or goods. Non-affiliated non-management directors were considered to be independent. The next step was the introduction of the lists of independence criteria in the different corporate governance codes and listing rules, which are discussed in Part II of this study.

The brief outline of Gordon (2007) shows that the definition of independence has emerged over time, but the definitions alter with respect to more dimensions than time. The definitions of independence differ with respect to the parties which a director is expected to be independent of as well as the constituencies which they have to be loyal to. Narrow definitions require directors, as representatives of shareholders, to be independent of management in order to look after shareholders’ interests. Broader definitions also require them to take a position that is independent of management and to protect the interests of shareholders, but also to have loyalties to other specific constituencies, such as employees, consumers, women, minorities, society, and the environment (Brudney 1982: 599).

So there are broad definitions, narrow definitions and they emerge over time. But the underlying concept differs from definition to definition. For example, Langevoort defines “independence’ [as] a subjective concept that connotes a willingness to bring a high degree of rigor and sceptical objectivity to the evaluation of company management and its plans and proposals’ (2001: 798). In this regard he stresses the qualities somebody with independence must have. Becht et al. ally with Gordon and use a different angle and define a director as independent ‘if he or she is not otherwise employed by the corporation, is not engaged in business with the corporation, and is not a family member. Even if the director is a personal friend of the CEO, (s)he will be considered independent if (s)he meets the above criteria’ (2005: 23). This definition only stresses relationships and characteristics a director should not have, but does not pay attention to the competences or tasks of such an independent director. On the other hand, Langevoort does not include any characteristics of an independent director in his definition.

The difference in approach between the two definitions in the previous paragraph illustrates the difference in the underlying concepts of independence definitions. A note in the Harvard Law Review identifies three broad categories of independence concepts. The definition regards the independent director either as a disinterested outsider or anobjective monitor or as anunaffiliated professional (Harvard Law Review Note 2006: 1555). The next three subsections describe these three concepts, with the subsections written from the perspective of a unitary board structure. Thereafter, a comparison is given in subsection 2.4.4.