By Kerryn Newton, CEO and Board and Governance Specialist
There are many different types of directors – executive, non-executive, alternate, de facto, shadow etc – but perhaps one of the most difficult types of director to be is a nominee director.
A nominee director is someone appointed to a board by another nominating entity. Some structures where nominee directors commonly arise include:
- federated structures where, for example, the states and territory bodies have a right to appoint a director to the national board
- investee companies where the investor has a right to nominate a director to the investee company board
- corporate groups where the parent company appoints either a parent company director/s or independent non-executive directors to subsidiary boards, and
- industry-led research entities, where a participating institution, such as a university, appoints someone to the board.
What does the law say about nominee directors?
As with a director the law makes it clear that nominee directors have a duty to act in the best interests of the company to which they are appointed and not the interests of their nominator.
In Australia, nominee directors can pay regard to the interests of their nominator if they genuinely believe they are acting in the best interests of the company. But, in practice, this might not be so straight forward. Of course, the nominating entity has usually put the director there to look after their interests. Nominee directors are also commonly expected to report back to their nominator on company performance.
Reconciling potential conflicts between the board to which they are appointed and the interests of their nominating entity means that life can become difficult for nominee directors. This can be exacerbated where the nominee director is an employee of their nominating entity and their employment agreement includes provisions relating to loyalty and best interest duties to that entity.
What are some practical tips for nominee directors?
Nominee directors might find the following tips useful in understanding and managing their role.
- Read the company constitution to see whether there are any provisions relating to nominee directors. In some cases, the company constitution might permit a nominee director to act in the interests of the appointor – which is essentially an agreement by all shareholders to narrow the nominee director’s fiduciary duty to the company.
- Seek to understand where there might be potential or actual conflicts in relation to the company to whose board they have been appointed and the loyalties they hold towards their nominating entity. If you are an employee of the nominating entity, ensure that you understand how your employment agreement might be relevant.
- Seek training and guidance from your nominating entity and the board to which you are appointed regarding your role and duties – and seek legal advice if required. This training and guidance should include how conflicts are to be resolved.
Additional clarity for nominee directors might also be provided by way of a deed of appointment, a shareholders’ agreement or some other written MOU / protocol between the parties covering:
- How conflicts are to be resolved or avoided in the first place
- What information a nominee director can share with their nominator
- What information is to be withheld from a nominee director when it is in the best interests of the company to do so
- Conversely, what procedures will be followed when nominating entity information should be withheld from the nominee director.
Nominating entities should also think carefully about who they appoint to boards. Not only should nominating entities seek to appoint directors with relevant skills and experience but they should also be mindful of conflicts that might arise due to their positions.
