Common Director Independence Terminology

The large number of terms surrounding director independence can cause confusion; below is a short list of common director identification terms. Some terms do not have “agreed-upon” definitions and are used informally, while other terms do have specific definitions. Each term is explained in isolation and it is noted whether or not terms relate to one another.

The Dodd-Frank Act, passed after the 2007–2008 financial crisis, built on previously existing public company board independence rules. It mandated that listing exchanges adopt new standards for compensation committee independence, and the New York Stock Exchange (NYSE) and NASDAQ proposed these rules. The proposals, currently awaiting Securities and Exchange Commission (SEC) approval, will add complexity to existing director independence terminology.