Nominee director is a person who is officially chosen in a company to ensure high quality of corporate governance and to ensure that all business affairs are conducted in accordance with the company's regulations. He or she is an affiliated director whose task is to ensure proper and effective protection of the interests in the represented institution (A.C. Fernando 2012, p. 192).
Boards of Directors consists of inside and outside directors. Nominee director is one of three types of outside directors. These directors have a legally considered significant share in the company's capital or they perform this function because of their shareholder status. They represent also significant shareholders. One of them may also be director of the parent company or senior executive (G. Stein, S. Plaza 2011, p. 2).
Theoretical background of nominee director
The theoretical approach to the meaning of nominee director in the organization can be divided according to two points of view: Classical view and Liberal Theory.
The most important goal of corporate governance is to determine the direction and performance of the company. Its main participants are:
- the shareholders,
- the management,
- the board of directors,
- other participants (the customers, suppliers, employees, creditors and the community).
The activity of directors and managers (especially in the area of jurisdiction) is determined by a special law code which is called Statutes governing Companies. The law for nominee directors is restrictive, because according to it they are on the same level as normal directors, which means that everyone has the same duties. They should be guided by their Duty of Loyalty, by representing the company and taking care of its interests. At the same time, they should not engage in activities that are contrary to the interests of the company. Rights and obligations of the company director are defined in articles of association and in the memorandum.
The role of nominee directorship is enhanced in liberal point of view, through the continuous development of management structures. The theory has been strengthened by the need for greater supervision over the company's affairs and increase the number of directors. Nominee directorship have an accepting in Canada and Australia. Under this theory, nominee directors have a special role which is different from the role of a normal director.
Liberal Theory introduces a fresh look at the role of nominee director. Considering the corporate primacy, it is possible to act in accordance with the interests of the company and the director. However, the company's interest is the most important, so if both can not be reconciled, the company's interest must win. The second principle of this approach (Attenuated Duty Approach) is that private regulations are acceptable in the form of a formal weakening of duties for the nominee director (Kahoro M. M. 2017, p. 15-16).
Examples of Nominee director
- Independent Directors: Independent directors are usually appointed by the board of directors of a company to represent the interests of shareholders and to provide an impartial opinion on the board’s decisions. The independent director is expected to act as a "watchdog" for the shareholders, to ensure that the company abides by the laws and regulations, and to make sure that the company is acting in the best interest of all shareholders.
- Trustee Directors: A trustee director is an individual who is appointed by a trust or foundation to handle the day-to-day operations and activities of the trust or foundation. The trustee director is responsible for ensuring that the trust or foundation is managed in accordance with the trust or foundation documents, and that all transactions are conducted with integrity and in accordance with legal and regulatory requirements.
- Shadow Directors: Shadow directors are individuals who, although not formally appointed, have a significant influence over the decisions and activities of a company. They are usually individuals with close ties to an existing director, or they may have a professional relationship with the company such as a lawyer, accountant or financial advisor. Shadow directors are expected to act in the best interests of the company, and they are legally liable for any actions taken by the company on their behalf.
- Non-Executive Directors: Non-executive directors are independent directors appointed to provide an independent perspective on the operations and decisions of the company. They are usually appointed by the shareholders and are expected to act in the best interests of the company. Non-executive directors are expected to provide external expertise and insight to the board and to ensure that the company is operating in line with its objectives.
Advantages of Nominee director
A nominee director has several advantages. Firstly, they provide an additional layer of corporate governance, as they are officially chosen to ensure all business affairs are conducted in accordance with the company's regulations. Secondly, they act as a buffer between the company and the shareholders, as the director is appointed to represent the interests of the shareholders. Thirdly, they provide a useful resource for non-executive directors, as nominee directors can provide an independent view on the company's strategy and operations. Fourthly, they can provide an independent view on the company's strategies, which can help to ensure the organisation is making the best decisions for its future. Finally, it can be beneficial for a company to have a professional director on board, as this can help to ensure the company is operating within the relevant legal and regulatory framework.
Limitations of Nominee director
A nominee director has certain limitations, including:
- Difficulty in providing independent oversight: As the nominee director is not elected by shareholders and is appointed by the board, they may not be as independent as other directors. This could make it difficult for them to provide an objective and unbiased opinion on the company’s affairs.
- Conflicts of interest: If the nominee director is affiliated with the appointing board, there is a risk of a conflict of interest. This could lead to the director acting in their own interests instead of the company’s.
- Lack of expertise: Nominee directors may lack the experience and expertise to make informed decisions. This could lead to decisions being made that are not in the best interests of the company.
- Limited authority: Nominee directors may not have the same authority as other directors. This could mean that their decisions are not binding on the company and may not be followed.
- Limited liability: Nominee directors typically have limited or no liability for the company’s actions. This means that they may not be held accountable for any losses or damages that may occur.
In conclusion, nominee directors have certain limitations that could lead to ineffective decision-making and a lack of accountability. It is important for companies to ensure that the nominee directors they appoint have the experience and expertise to make informed decisions and are independent of the appointing board.
Apart from ensuring high quality of corporate governance and monitoring business operations, there are other approaches related to the role of the nominee director.
- The nominee director should be knowledgeable in the company's business operations and should be able to provide strategic advice and guidance.
- The nominee director should also have the necessary financial expertise to be able to advise the company on financial matters.
- The nominee director should also be aware of the legal requirements and regulations associated with the company's operations and should be able to ensure that the company is compliant.
- The nominee director should ensure that the board of directors is kept informed of all relevant developments and should be able to provide independent advice and opinion.
- The nominee director should also be able to provide guidance on ethical and responsible corporate behaviour.
In summary, the role of the nominee director is to ensure high quality of corporate governance, to provide strategic and financial advice, to ensure compliance with legal requirements, to keep the board informed, and to promote ethical corporate behaviour.
|Nominee director — recommended articles
|Shadow director — Quasi partner — Extraordinary general meeting — Corporate trustee — Corporate opportunity doctrine — Statutory obligation — Fiscal Agent — Management rights — Statutory meeting
- Ahern D. (2011), Nominee Directors’ Duty to Promote the Success of the Company: Commercial Pragmatism and Legal Orthodoxy, Sweet & Maxwell, London
- Fernando A. C. (2012), Corporate Governance: Principles, Polices and Practices, Dorling Kindersley, India, p. 192
- Kahoro M. M. (2017), Nominee directorship in Kenya, an examination of a more liberal approach, Strathmore University, p. 15-16
- Steger U., Nedopil Ch. (2014), The Incredible Adventures of Carla. Practical Guide for Nominee Directors, International Finance Corporation, Washington
- Stein G., Plaza S. (2011), The role of the independent director in CEO supervision and turnover, IESE Business School, p. 2
Author: Dominika Magusiak