independent director investment & finance definition

A member of a company’s board of directors who does not otherwise have substantial connections with the company whose board he or she sits on. According to the rules passed by the New York Stock Exchange, an independent director is someone who does not have a “material” relationship with the company, although “material” is not defined. NASDAQ rules specify that in order to be independent, a director can’t make any charitable contributions of more than $200,000 or contribute more than 5 percent of a company’s gross revenues in situations in which a director also is an officer of the company or charity.

Companies also have created their own guidelines that go beyond those specified by the stock exchanges. For example, General Electric Corp. (GE) defines a material relationship as one in which the transactions between GE and the director’s company equal more than 1 percent of the revenues of the director’s company. A director also won’t be deemed independent if he or she is associated with a charity to which GE contributes more than 1 percent of the charity’s annual receipts.

Other common terms for independent director are outside director and non-executive director, which is commonly used in the United Kingdom.