Non‐Executive Directors: A Question of Independence

Abstract

This Australian study utilises disclosure requirements in accordance with Australian Accounting Standards AASB 1017: Related Party Disclosures, to provide a richer description of non‐executive director characteristics. Consistent with the findings of Baysinger and Butler (1985) we find a three scale classification system for directors (insider, grey area, outsider) to better reflect board composition.The results indicate that 35% of non‐executive directors were involved in transactions with their companies which potentially threaten their independence (i.e. grey area directors). On average, our findings reveal that the combination of insider and ‘grey’ area directors would constitute a majority of the board. This could lead to companies appearing to comply with current Australian recommendations through possessing a non‐executive majority on the board, whilst in fact being controlled by internal management. This finding similarly applied to the composition of the audit committee.