It’s time to talk about nominee directors

“A nominee director stands somewhat apart from the other directors by virtue of having been nominated by a shareholder, or other stakeholder of the company, to represent the shareholder’s particular interest... The difficulty that arises for a nominee director is that in the eyes of the law they are treated like any other director, but there is usually an expectation that they will act with some awareness of their appointer’s interest.” Roisin Liddy-Murphy

The rise of the nominee director in public-purpose organisations

Nominee directors—those appointed to represent specific groups or interests—aren't anything new but they are on the rise.

Historically, they have been far more common in the private sector, where they represent shareholders, creditors or debenture interests.

In public-purpose organisations, nominee directors might be student or staff representatives on university and further education boards, or tenants on housing boards, government-appointed directors on arm’s length bodies, lived experience directors on charity boards or regional representatives common in national sporting bodies.

They are being increasingly utilised as a means of giving key stakeholders a legitimate voice in governance, and giving boards proximity and connectivity to the views of those groups.

And yet, nominee directors operate in a state of tension. Representation and principled governance are not automatically good bedfellows. Too often, the arrangements are unsatisfactory and ultimately ineffective. Why? What can be done about it?

Representation vs. effectiveness

“Or take a nominee director, that is, a director of a company who is nominated by a large shareholder to represent his interests. There is nothing wrong with that. It is done every day. Nothing wrong, that is, so long as the director is left free to exercise his best judgement in the interest of the company which he serves. But if he is put on terms that he is bound to act in the affairs of the company in accordance with the direction of his patron, it is beyond doubt unlawful.” Lord Denning

Nominee directors are legally recognised directors of the organisations to whose board they have been appointed. They are not a distinct class of director under law, and they are bound by the same legal and fiduciary duties as other directors/trustees in the primary interest of their organisation, theirs is just a different route to the board.

Yet Lord Denning's famous judgment on nominee directors highlights the potential conflict: nominee directors must be free to exercise their best judgment, uninfluenced by their nominators. When this independence is compromised, it undermines the integrity of the board and can lead to poor decision-making.

All too often, nominee directors see their primary function is to represent the interests of their nominating stakeholder(s)—often because of poor induction, training or definition of their role. This is often then reinforced by how they are used by the chair and other board members.

Interests will often coincide and there will be no conflict or tension but if there is, there is no question, in law, where the responsibility lies: their principal duty is to the board and the organisation; nominator needs are secondary.

Can and should a nominee director act in the interest of their representative group?

One of the big issues with nominee directors is they seen and used as a totemic voice for their representative group, often without the structures outside the board to engage the groups they represent in a way that would give this position legitimacy.

It is not uncommon to see a board turn to a staff board member to represent staff, thus focusing this responsibility on them and minimising the whole board’s responsibility to operate in the interests of this key stakeholder group. It is akin to a board turning to a woman member on matters of gender inequality, or a BME member for issues related to diversity and inclusion.

There are some similarities between nominee directors and NEDs allocated lead roles for topics such as diversity, sustainability, etc. It’s a model that is increasingly being used in various sectors—such as in trust ports where the specific NED roles on boards are prescribed in the legislation—but which isn’t without risks. GGI has never been a fan of NED leads because they:

• pose a risk to NED independence
• incentivise parochialisation of mindset and focus
• can lead to an operational or managerial level of involvement
• can cause boards to defer to lead directors and make assumptions that may not be correct – and probably do not fulfil the assurance regime.

Another key issue with nominee directors is that their existence often precludes the board from thinking about developing its connectivity to the stakeholder groups represented in its makeup through other means and channels.

We’ve come across boards that know little and certainly have no reach into staff networks in their organisations or any meaningful engagement with, for example, their student unions beyond having their representatives sat alongside them in the board.

Conflicting interests

Nominee directors are in some ways defined by an intrinsic threat of conflict of interest. Appointed to represent specific constituencies within an organisation, they occupy a complex position at the intersection of representation and fiduciary duty. In organisations operating for a public purpose, such as higher education institutions and NHS trusts, the potential for conflict of interest is particularly acute.

The core tension for nominee directors lies in fulfilling their representative role while simultaneously acting as independent board members. On one hand, they are expected to champion the interests of their constituents. On the other hand, they must exercise independent judgement in the best interests of the organisation. If there is any conflict, the representative role has to take second place. The mitigation is that often the interests of the two coincide. Often the challenge is one of perception—a nominee director representing the interests of a particular group may be seen as prioritising those interests over the broader organisational goals. This can lead to scrutiny and challenges to their decisions, regardless of their merit.

Rather than invalidating the concept of nominee appointments outright, legally the focus has been on the specific actions of the director, assessing whether they acted in the best interests of the organisation or succumbed to undue influence from their representative group. The potential for conflict of interest remains a significant challenge for nominee directors in public sector organisations and needs more careful thought in policy and practice than we often see.

To mitigate this risk, clear guidelines, robust governance structures, and transparent decision-making processes are essential. This starts with a conflict-of-interest form which is mindful of this exact challenge, specifically for staff appointees and those who may also have union roles. Capturing that key information and having due process in place to manage potential conflicts in areas like this is important and sets a tone early. Some organisations get themselves into knots with operating on the basis of ‘perceived’ conflict, outside of any formal definitions in their governance framework. Caution must be exercised around this.

Information governance

One of the big challenges with nominee directors is their exposure to sensitive and commercial information. How they report this information back to their nominees needs to be thought about on both sides.

Nominee directors face a delicate balancing act when handling sensitive and commercial information. They must protect the company's interests while also keeping their nominating party informed. This often necessitates strict information compartmentalisation. To mitigate risks, clear guidelines need to be in place alongside robust confidentiality agreements. These need to be highlighted in the induction process with additional training as required. Effective communication channels should be established, with information shared judiciously, avoiding unnecessary disclosure. Regular review of information sharing practices is crucial to adapting to evolving business landscapes and regulatory requirements.

Nominees on subsidiaries

Increasingly over the past 15 years or so, NHS trusts, local authorities and other public-purpose organisations have looked to new commercial ventures to support and diversify their income, and develop or improve service provision. This has created a raft of subsidiary organisations, often new terrain for the leaders and boards of public purpose organisations to navigate.

Nominee directors, appointed to represent the interests of a parent company or other stakeholders in a subsidiary, can be a valuable tool in corporate governance. However, their role also presents unique challenges and considerations. Key considerations include:

• Clarity of role and responsibilities:
  • Defining the nominee director's role, authority, and responsibilities is crucial to avoid conflicts and misunderstandings.
  • Clear communication channels between the nominee director, the parent company, and the subsidiary's board are essential.
• Conflict of interest:
  • Nominee directors must be aware of potential conflicts of interest between their role as a representative of the parent company and their fiduciary duties to the subsidiary.
  • Establishing clear guidelines and mechanisms for managing conflicts is essential.
• Knowledge and expertise:
  • Nominee directors should possess sufficient knowledge and expertise to contribute effectively to the subsidiary's board.
  • Providing adequate training and support can enhance their effectiveness.
• Communication and relationship building:
  • Effective communication with other board members, management, and stakeholders is vital for building trust and collaboration.
  • Nominee directors should strive to build strong relationships within the subsidiary.
• Legal and regulatory compliance:
  • Nominee directors must comply with the laws and regulations governing the subsidiary's jurisdiction.
  • Staying informed about legal and regulatory changes is crucial.

And there are some key challenges to be carefully thought through:

• Balancing interests:
  • Nominee directors often face the challenge of balancing the interests of the parent company with the interests of the subsidiary.
  • Finding common ground and fostering a collaborative approach can be difficult.
• Information flow:
  • Ensuring timely and accurate information flow between the parent company and the subsidiary is essential.
  • Delays or misunderstandings can hinder decision-making.
• Power dynamics:
  • Nominee directors may have limited power compared to other board members, which can impact their ability to influence decisions.
  • Building alliances and leveraging relationships can be crucial.
• Time commitment:
  • The role of a nominee director can be time-consuming, especially if the subsidiary is in a different location and utilising in person meetings and beyond-the-boardroom time demands.
  • Effective time management is essential.
• Succession planning:
  • Having a clear succession plan for nominee directors is important to ensure continuity and knowledge transfer.

By carefully considering these factors and navigating the potential challenges, public purpose organisations can maximise the benefits of having nominee directors on subsidiary boards.

Elective vs. selective appointment

There are a couple of different models for the appointment of nominee directors:

• Direct election: stakeholders vote for representatives to serve on governing bodies.
• Appointment by stakeholder body: interested party/ shareholder/ union or association nominates representatives.
• Skills-based selection: similar to the normative approach of appointing independent directors to the board, based on skills and experience-based criteria, ideally matched to specific identified gaps.
• Co-option: selected staff members are invited to join governing bodies or committees.
• Hybrid models: a combination of election, appointment, and co-option.

The method of appointing nominee directors significantly impacts their role. The purely elective model, common in student and staff representation, ensures democratic legitimacy but can lead to directors with limited governance experience and expertise or electioneering in a way that is potentially damaging to the execution of their office. This in turn can hinder their ability to contribute effectively to board discussions and decision-making and create strained relations from the start if their election pitch has involved criticism of the board. Elective models also often lead to a sort of ‘buggins turn’ approach, which is antithetical to good governance, delivering directors that don’t meet the criteria for effectiveness. These types of appointments can undermine the board and the achievement of what they've been put in to do in the first place.

A skills-based selective appointment process, while less democratic, could result in directors with stronger governance capabilities. Equally important is that this approach allows the board to be very clear and in control of the expectations of the role from the outset, rather than allowing this to be shaped in by the individual in the elective model. However, it risks undermining the value so often placed in the representative approach and could lead to perceptions of bias or exclusion. Interestingly, a number of universities have been moving away from democratic appointment to skills-based selective appointments, though not without exercising unions or the stakeholder communities in question.

A co-opted model involves bringing in individuals who are not formally elected or appointed but are invited to participate in a governing body or committee. This can include staff members to ensure their perspective is considered. It looks on the surface like a neat workaround for some of the challenges but is it? It creates a definitive hierarchy of board members, which seems more likely to extrapolate the issue of a board divided into factions than resolve it. It also takes away the powerful binding agent, which is the collective role and accountabilities that nominees have as directors / trustees under corporate/charity law, equitable across all board members.

Pros of co-opted model:

• Flexibility: it allows for rapid inclusion of specific expertise or perspectives.
• Efficiency: can be quicker to implement than formal election or appointment processes.
• Diverse viewpoints: can introduce fresh perspectives and ideas.

Cons of co-opted model:

• Lack of representativeness: co-opted members may not accurately reflect the views of their nominee(s).
• Potential for imbalance: the balance of power can shift if there are too many co-opted members.
• Short-term focus: co-opted members might have a limited tenure, leading to inconsistent representation.

Boards are teams, or should be, and the most effective, high-performing boards are characterised by this. All members must be able to fulfil the basic criteria of being able to perform as a good contributor with skills and attributes that will enable the organisation to fulfil its purpose. Getting a balance of skills and experience, age and diversity is essential to developing a high performing board. Their composition and management should be seen as an effort to achieve this. Something we see quite a lot with nominee directors is the fracturing of the NED components of boards into mini teams/fractions, or the viewing of nominee directors as more observers than full board members.

Other challenges and considerations

Implementing effective nominee director roles, especially in contexts where the nominees on the board exist in power/relational dynamics with other board members outside of the boardroom, such as service users, staff and students. These present challenges:

• Workload: the role can be demanding, requiring significant time commitment.
• Conflict of interest: balancing staff interests with institutional goals can be difficult.
• Power dynamics: navigating relationships with senior management and other board members can be complex.
• Lack of support: institutions may not provide adequate resources or training for nominee directors.

Overcoming challenges

To maximise the contribution of nominee directors, several strategies can be employed:

• Comprehensive induction and training: Equip nominee directors with the necessary knowledge and skills to effectively participate in board deliberations.
• Clear role definition: Establish clear expectations for the role, balancing representative responsibilities with the broader fiduciary duties of a director.
• Mentorship and Support: Pair nominee directors with experienced board members to provide guidance and support.
• Effective chairship: A good chair can help ensure more appropriate use of the nominee directors on their board, manage potential conflicts of interest and ensure effective board dynamics.

But there is a larger point here: all boards need to attend to the differential developmental needs of their constituent members and to the board as a whole. Nominee directors must be seen as a core part of the board and not ‘othered’. The key is to see things in terms of the board as a cohesive, effective group - as a team.

Conclusion

There is an argument against nominee directors in their entirety and seeing them so ineffectively used in practice does tempt one in this direction. And yet this in itself is a reason not to, for so often they are ineffective because they are not and aided set up to be so. One must not fall into the trap of casting judgement on effect rather than cause. Nominee directors bring valuable perspectives to boards, but their effectiveness is contingent on careful management. Striking the right balance between representation and independence is crucial.

Directors have a clearly defined role to play largely related to acting in good faith to promote the organisation's success. Owners and stakeholders also have interests and in the case of owners, rights, which there are clearly defined ways of exercising. There are risks in confusing these and having nominee directors sails close to this particular wind. There is nothing intrinsically wrong with organisations having the right to nominate directors to be in the room with the rest of the board and making points and arguments that may not otherwise be aired. But the overriding concern should be for the board itself to act as a professional and capable whole with a range of skills, experience, expertise, attributes and diversity at its disposal. High performing boards are an ambition that more should adopt.

The challenges are about the whole; dissecting it into its constituent parts is damaging. Governance is the means to the end of success - it is not an end in itself and nominators should reflect on how their interests are best served. While the elective model has democratic appeal, a hybrid approach combining election with skills-based selection may offer the best of both worlds. Ultimately, the goal should be to create a board environment where all directors, including nominees, can contribute fully and effectively to the organisation's success. Good leadership is key.