Questioning an Independent Director’s Independence.

By Kenneth A. Rosen

Historically, the assessment of director independence has revolved around scrutinizing tangible business relationships and economic ties between outside directors and the companies they serve. However, a pivotal shift is reshaping this landscape, with courts increasingly examining the relationships between independent directors and the entities responsible for their nomination. This shift underscores the critical importance of thorough due diligence for general counsel when considering the nomination of an independent director.

Expanding the Definition of Independence

Traditional criteria, such as employment status, familial ties, equity interests, and business transactions, have been cornerstones of director independence assessments due to their quantifiable nature. Yet, recent trends indicate a growing emphasis on more subjective and less overt connections, especially those involving the identity and relationships of those responsible for appointing independent directors.

As the standards for director independence evolve, a broader definition is emerging, necessitating a recalibration of due diligence processes. Beyond the easily quantifiable factors, the intricate web of personal connections and nominating influences is gaining prominence in determining a director's independence. To meet these evolving standards, general counsel, working in collaboration with boards and nominating entities, must navigate these nuanced relationships to ensure the integrity of the director independence evaluation process.

The Imperative of Proactive Due Diligence

In an era of heightened scrutiny, the shift in focus requires a proactive approach to due diligence. Legal advisors must go beyond the conventional criteria and delve into the complexities of less visible relationships. It is not merely about ticking boxes but understanding the dynamics that may compromise a director's claim to independence. This proactive stance is essential to address challenges to director independence on grounds that extend beyond traditional metrics.

Anticipating Challenges in Corporate Governance

This evolving landscape prompts a reevaluation of corporate governance practices. Boards and legal advisors must anticipate and address nuanced considerations to ensure that the appointment of independent directors aligns with the changing legal standards. It is no longer sufficient to rely solely on historical criteria; rather, a forward-looking approach is necessary to adapt to the evolving expectations of stakeholders and the legal environment.

Recommendations for Corporate Governance Excellence

1. Expand Due Diligence Protocols: Incorporate a comprehensive review of less quantifiable factors, including personal connections and nominating influences, into due diligence protocols.

2. Enhance Board Education: Boards should be educated on the shifting landscape of director independence assessments, empowering them to make informed decisions and contribute to due diligence processes.

3. Embrace Proactivity: Legal advisors and boards should adopt a proactive stance, anticipating challenges and addressing them before they become points of contention.

4. Regularly Review Governance Practices: Periodic reviews of corporate governance practices ensure alignment with evolving legal standards, maintaining the integrity of the director independence evaluation process.

Conclusion

As the criteria for director independence continue to evolve, a comprehensive and proactive due diligence approach becomes essential for maintaining the highest standards of corporate governance. Navigating the nuances of personal connections and nominating influences is crucial for preserving the integrity of the director independence evaluation process. By expanding the definition of independence and embracing a proactive mindset, companies can adapt to the changing landscape and uphold the principles of effective corporate governance.