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What is a nominee director and why do companies use them?

06/28/22 · Reports · This is not a financial advice
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The board of directors is responsible for a company's overall management and strategic direction. It comprises individuals with the necessary skills and experience to provide sound judgment and leadership.

However, there may be situations - and not only in the crypto industry - where the anonymity of the actual company director is an important goal.

This is where a nominee director comes in.

Who Is a Nominee Director

  • A nominee director is a person appointed by the company directors to act in their place when they are absent.
  • Nominee director is typically appointed for their expertise in an area related to that in which the company trades. It is a person who may not have any prior relationship with the company
  • Nominee director can take on the role of being the public person representing the company, while the other directors remain private.

It appears that the crypto platforms Phemex (Singapore) and Bitforex (Hong Kong) may have opted to use this type of setup.

A nominee director can also be appointed to take on the role of a company director if the original director resigns or dies. Broadly speaking, there are no specific requirements for someone to become a nominee director. Some countries set up specifics in their laws, though. For instance in Hong Kong it calls for any nominee director to have citizenship or permanent residency.

In most cases, the nominee director will have the skills and experience to take on the company without assistance, if needed. So, a sound choice of nominee director is paramount for good leadership of the company. A good nominee director for Hong Kong business should be able to maintain the anonymity of the actual director, if desired.

How Are Nominee Directors Useful

As the global business landscape continues to change and evolve, so too do the types of businesses being set up. This has increased the use of nominee directors, particularly in Hong Kong.

Nominee directors can be helpful in several ways. They include:

  1. They Provide Anonymity

    Nominee directors are crucial for companies that want to keep their directors' identities secret for various reasons.

    There are many legitimate reasons why it may be better to hide the identity of a company’s director.

    For example, they may be worried about retaliation from competitors, or they may want to avoid undue public scrutiny.

    This helps a lot when it comes to being safe from competitors in high-competition industries where slander digging out dirt is a common tactic.

    This is not all there is to the function of nominee directors, though.

  2. They Provide Continuity for the Company

    Nominee directors can provide continuity for the company if the original directors are absent. It's vital for the company's running and ensures that there are no disruptions in its management or strategic direction.

    There can be several management disruptions that can occur when there is no continuity on the board. It could include things such as:

    • Disruptions in the strategic direction of the company
    • Lack of communication or coordination amongst the directors
    • Inability to make decisions or take action

    These disruptions can be costly and time-consuming to fix. As such, it is vital to have a nominee director in place to avoid them.

  3. Acting as a Sounding Board for the Other Directors

    A sounding board is a person who gives you impartial feedback and allows you to "bounce ideas off of them."

    This is important for company directors as it allows them to get another perspective on the decisions that they are making. It can also help to avoid groupthink amongst the directors, or conversely, it can avoid miscommunication among them.

    A nominee director can be an excellent sounding board for the other directors. They are usually an expert businessperson with years of experience but at the same time they are not involved in the day-to-day running of the company. This means that they can offer an impartial viewpoint and backing it up with their vast experience.

  4. They Can Bring New Skills and Experience to the Company

    Nominee directors can bring more skills to the company. It's vital for companies that want to expand their expertise in a particular area. For example, they may appoint a nominee director with financial expertise to help them with their accounting and financial planning.

    Appointing a nominee director can be an excellent way to expand the skills and experience of the company. They may bring in new perspectives and ideas that the other directors have not previously considered. Additionally, they can help mentor and train the other directors in their areas of expertise.

  5. Spreads the Workload of the Directors

    Nominee directors can help to minimize the burden of work among the members. It's essential for companies that have a large number of directors or that have directors with busy schedules. By appointing a nominee director, they can share the company's responsibilities amongst themselves.

    This can be particularly useful for companies going through a period of growth or expanding into new markets. By appointing a nominee director, they can ensure that the workload is spread evenly amongst the directors.

To sum it up, nominee directors can add a lot of value to a company, even if it’s just to protect the other directors from too much public attention. In many cases they add far more tangible value that, though.

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