When is a director no longer independent?

Does the holding of company shares automatically compromise a director's independence? And when is a director no longer independent?

These questions have troubled shareholders, prospective directors, legislators, and researchers for many years. I suggest the answers depend on what one means by the words "independence" and "independent", because there is a world of difference between acting independently (independence of thought and decision) and being independent (no vested interest).

If a director holds no pecuniary interest in the company then it is reasonable to expect them to act independently in their considerations, discussions and decision-making. Things can get a little more complicated when a director holds shares. They are no longer independent (by definition), however they may still act independently. In my experience, there is no hard-and-fast line, beyond which independence is automatically compromised. Some directors with small shareholdings (1–3%) struggle to act independently, whereas others with larger holdings (5–10%) seem to be able to act independently, even though they are not independent.

I would be interested to hear the views of others, particularly behavioural specialists, to debate these questions, and determine whether finding answers actually matters (or not).