Director Independence Redefined

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The third edition of the ASX Corporate Governance Principles and Recommendations (taking effect for listed entities’ full financial year commencing on or after 1 July 2014) has elaborated further on who constitutes an independent Director. Specifically, Recommendation 2.3 requires listed entities to disclose the names of Directors considered by the Board to be independent Directors.

Director independence redefined

A number of factors relevant to assessing the independence of a Director are listed in Box 2.3. The third edition amended these indicia in three key areas. Specifically, they have been amended to (with our associated questions in italics):

  1. Expand the references to material suppliers and customers to cover those relationships, and other material business relationships, going back three years;

    • Why is three years the magic number?
    • What materiality thresholds apply?
    • What other material business relationships would be covered (other than as a supplier or customer?
    • Are other group members included or just ‘child entities’?
  2. Include close family ties in the Box rather than in the commentary;

    • What difference (if any) is there in including such relationships within the formal recommendation rather than in the associated commentary?
    • How much broader is the new definition now that it refers to ‘close family ties with any person who falls within any of the categories described above’?
  3. Include “been in the role for such a period that independence may have been compromised”.

    • Whilst there is recognition that a mix of tenures is preferable, how often is it appropriate to reassess Directors who have served for more than ten years?
    • Should there be an increasing threshold level of understanding of the entity and its business as the tenure of Directors increase?

The classification of a Director as independent under Recommendation 2.3 has clear implications for other Recommendations relating to composition of the nomination committee (Recommendation 2.1), composition of the Board (2.4), the Chair of the Board (2.5), composition of the audit committee (4.1), composition of the risk committee (7.1) and composition of the remuneration committee (8.1).

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