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ACCA Strategic Professional · Strategic Business Leader · The board of directors

Castellan Retail has a board of nine: the chairman, the chief executive, the finance director, two other executives and four non-executives. One non-executive, Ms Rao, was Castellan's finance director until three years ago and receives a share option scheme from her former role. Under typical corporate governance code principles, how should the board treat Ms Rao when assessing board independence?

Ms Rao should be treated as not independent. Governance codes typically regard directors who were employees within the last five years, or who hold share options from the company, as having relationships that could compromise objective judgement, so she cannot count towards the independent non-executive requirement.

  1. AAs independent, because she is a non-executive and no longer employed
  2. BAs independent, because former employees always bring valuable knowledge
  3. CAs not independent, because of her recent employment and continuing share-based link to the companyCorrect
  4. DAs independent only if she also chairs the audit committee

Explanation

Codes typically treat a recent former employee (often within five years) and a director with participation in share option or performance schemes as lacking independence, because their judgement may be compromised. Either factor alone raises doubt. Being non-executive on the board does not by itself establish independence.

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