Which statement best differentiates independent directors from de facto directors?

• A. Independent directors must be employees; de facto directors are outsiders.
• B. Independent directors have no material ties to management; de facto directors act as directors without formal appointment.
• C. Independent directors are elected by employees; de facto directors are chosen by management.
• D. Independent directors cannot serve on audit committees; de facto directors must.

Answer: (B)

Independence in directors means having no material ties to management that could compromise impartiality, while a de facto director is someone who performs the duties of a director without formal appointment. The statement matches this distinction: independent directors have no material ties to management, whereas de facto directors act as directors without formal appointment. The other options mix up who counts as independent (employment status isn’t the sole determinant) or describe de facto directors inaccurately (they’re defined by acting like a director without formal appointment, not by how management selects them or by any absolute prohibition on audit committees).