Superannuation funds seeking to appoint nominee directors (part two)

Superannuation funds seeking to appoint nominee directors (part two).

Background

Part One of this blog series considered the growth of the superannuation fund industry in Australia and recent decisions by some industry funds on matters in the Environment, Social and Governance space (ESG).

Part One considered the move by HESTA to gain Board seats for a number of potential nominee directors.  This document considers the position of nominee directors and in particular their commitment to act in the best interests of the company whose board they sit on and what (if any) exemptions might be available to them in their decision-making.

What is a Nominee Director?

There is no definition of a Nominee Director in section 9 of the Corporations Act 2001 (Cth) however, section 203D (1) reads: “If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed”.

From a purely commercial perspective, a nominee director is generally taken to mean a person who has been nominated and appointed by a third party, such as a creditor, employee, or shareholder, to represent their interests on a board of directors.

Directors of companies have numerous and substantial duties both under the common law, (unless common law duties are excluded by the company’s Constitution or some other agreement) and legislation. The general rule under both these features of the law is that a director owes their duties to the company on whose board they serve and not to the stakeholders who secured their appointment to the board.

This feature of the law was set down in the decision of Lord Cranworth LC in the seminal case of Aberdeen Railway Co v Blaikie Brothers (1854) 1 Patterson 394. However, there are two distinctive Australian cases on the nominee director’s duty of loyalty and the only Anglo-Australian decisions which pay more than passing attention to the duties of nominee directors: Levin v Clark [1962] NSWR 686 and Re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648. These two cases were decided by Sir Kenneth Jacobs, sitting as a single judge in the Supreme Court of New South Wales, and the essence of the two judgments is that while a nominee director must exercise their duties in the best interests of the company to which they have been appointed, they may nevertheless act to protect the investment of the stakeholder who has facilitated their appointment to the board so long as they continue to act in the best interests of the company.

Further clarification of this matter is to be found in section 187 of the Corporations Act under the heading “Directors of wholly-owned subsidiaries”. A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if:

• the constitution of the subsidiary company expressly authorises the director to act in the best interests of the holding company; and
• the director acts in good faith in the best interests of the holding company; and
• the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s acts.

Issues with Nominee Directors

Let us assume that the person to be appointed as a nominee of HESTA meets all the requirements to be appointed as a director of a company in Australia, namely:

• they are over 18 years of age;
• they have given their consent to act in that capacity; and
• they have a Director Identification Number.

In addition, there are no reasons to prevent their appointment, such as being an undischarged bankrupt or someone who has not complied with a personal insolvency agreement.

One of the important factors in having people appointed to a board is that they bring certain abilities and skills with them that reflect the business of the company and the challenges that it faces.

Let’s assume that the people to be nominated by HESTA meet the relevant requirements listed above.  What challenges will the nominee director face?

• Decision-making: if a decision needs to be made that directly, or indirectly, impacts the interests of an investor, will the nominee director feel necessary to subordinate the interests of the company to those of the investor?
• Information sharing: information obtained by nominee directors as a director of a company, such as board agendas, board papers and minutes of board meetings, are private and confidential and not to be shared unless with the express approval of the board. Therefore, those who are promoters of directors to a board should not rely on such an appointment to give them access to confidential information without putting themselves and their nominee in an invidious position that could potentially see the investor cast as a “shadow director”.
• Board dynamics: it can take time to build up a sense of purpose and unity within a board so that the decisions that are taken are in the best interests of the company and not of any particular interest group. The introduction of nominee directors to a board can alter the working dynamics of the board and its decision-making processes especially if there are disagreements between the appointed director and those of other board members.
• Competing obligations: nominee directors need to understand that their primary responsibility is to act in the best interests of the company on whose board they sit, and this is paramount to the interests of their investors unless, for example, a company’s Constitution allows for a reversal of this mandate.

To assist in managing some of these difficulties, the interests of the nominee director should be noted in the board’s Conflicts of Interest Register and the director should absent themselves from taking part in any discussion that involves the interests of HESTA and voting on any proposal as well.

Finally, nominee directors need to understand that they are not there to represent a single interest at the board table and they need to play an active role in all matters that come to the board. The appointment of one director, or perhaps more, will not guarantee the outcome sought by the investor.

While HESTA or other investors have every right to nominate a director, or directors, to the board of Woodside Energy or other listed/unlisted companies, they may not necessarily get the outcome they might be looking for.  In fact, it may make the life of the nominee director difficult while putting themselves at risk.

If you are interested in exploring these and other related topics in more depth, Bond University offers a Master of Laws in Enterprise Governance, the first and only degree of its kind in Australia, as well as a micro credential, the Advanced Credential in Enterprise Governance.To find out more about either of these educational opportunities please click on the links above.