Nominee directors: the good, the bad, and the ugly

Senior consultant Daniel Taylor looks at the increasing use of nominee directors in public-purpose organisations

This is a summary of a longer paper about nominee directors by Daniel Taylor. The full version can be found here.

Nominee directors have become an increasingly visible feature of governance, especially in public-purpose organisations. Their role, while often misunderstood or misapplied, brings both strengths and challenges to boardrooms.

Appointed to represent specific constituencies, nominee directors straddle the line between advocating for stakeholder interests and fulfilling their legal duties as board members. But how well does this work in practice? And more importantly, what are the consequences when it doesn’t?

Let's dive into the good, the bad, and the ugly of nominee directors.

The good: giving stakeholders a voice

At their best, nominee directors provide a vital link between key stakeholders and the organisations they govern. In the private sector, they often represent shareholders, creditors, or debenture holders. In public-purpose organisations, such as universities, healthcare bodies, and housing associations, nominee directors can represent groups like students, staff, or tenants. These representatives offer a valuable perspective that might otherwise be missing from board discussions.

Nominee directors serve as a bridge, ensuring that the voices of important constituencies are heard at the highest levels. In sectors where accountability to the public or specific groups is paramount, they provide boards with a deeper connection to the realities and concerns of the people they serve. The rise of this model in public governance reflects a broader push for inclusivity and legitimacy in decision-making.

The bad: conflicts and confusion

However, the very premise of a nominee director presents inherent tensions. Legally, nominee directors are required to exercise independent judgment in the best interest of the organisation as a whole. But they are also appointed with the expectation that they will advocate for the interests of a specific group. This duality can lead to confusion, conflicting loyalties, and ultimately, poor decision-making.

Nominee directors must be free to exercise their best judgment independently. If they are bound by the directions of the group they represent, it becomes unlawful. Too often, however, nominee directors find themselves caught in a conflict of interest, attempting to balance their fiduciary duties with the demands of their nominators. When conflicts arise, this can compromise the effectiveness of both the board and the individual director.

The practical result of these conflicts can be that nominee directors see themselves primarily as representatives of their nominating group, reinforcing a divide between them and the rest of the board. This misunderstanding can be exacerbated by inadequate induction, unclear role definitions, or insufficient governance structures. When boards fail to provide proper support, nominee directors may struggle to navigate their dual responsibilities effectively.

The ugly: the threat to board unity and governance

Perhaps the most concerning outcome of ineffective nominee directors is the fragmentation of boards. Instead of operating as cohesive units, boards can fracture into factions, with nominee directors seen as advocates for narrow interests rather than as contributors to the broader success of the organisation. This is particularly troubling in public-purpose organisations where the stakes are high, and decision-making needs to be impartial and aligned with the organisation’s mission.

The use of nominee directors can also prevent boards from thinking creatively about how to engage with stakeholders. Instead of building robust channels for stakeholder engagement, some boards fall into the trap of relying too heavily on their nominee directors to be the sole voice for these groups. This limits the depth of understanding and can isolate the board from broader input, ultimately undermining its governance effectiveness.

Moreover, the very presence of nominee directors can present an intrinsic threat of conflict of interest. Handling sensitive and commercial information is a delicate task for nominee directors, and when they report back to their nominators, there is often a thin line between transparency and breach of confidentiality. Without clear guidelines and well-established communication protocols, this can lead to a breakdown in trust and governance.

Finding a balance: solutions and best practice

While nominee directors bring unique challenges, there are ways to mitigate the risks. Comprehensive induction processes and ongoing governance training are essential to equip nominee directors with the tools they need to navigate their role. Boards must be proactive in defining clear expectations and ensuring that nominee directors understand that their principal duty is to the organisation.

Strong leadership from the board chair is also critical. An effective chair can manage board dynamics, mediate conflicts, and ensure that nominee directors are integrated as full members of the board, not sidelined as mere representatives. Furthermore, boards must develop robust processes for managing conflicts of interest, including strict confidentiality agreements and clear information governance practices.

In some cases, a hybrid approach to appointing nominee directors, blending election with skills-based selection, may provide the best of both worlds. This ensures that directors have both the legitimacy of stakeholder support, and the governance expertise needed to contribute effectively to the board’s work.

A necessary but complicated role

Nominee directors have an important role to play in today’s governance landscape, but it is one fraught with challenges. The key to unlocking their potential lies in robust governance structures, clear role definitions, and strong leadership. With the right support, nominee directors can be valuable contributors to the board, bringing diverse perspectives while still acting in the best interests of the organisation.

As more organisations look to engage with their stakeholders, the use of nominee directors will likely continue to rise. But as the saying goes, with great power comes great responsibility. It’s up to boards to ensure that their nominee directors are well-prepared to meet the demands of this complex and sometimes conflicting role. In the end, nominee directors can be part of the solution to stronger governance – but only if the right steps are taken to manage the risks.