What Is a Dummy Director?
A dummy director is a member of the board of directors (BoD) who acts and votes on behalf of a non-board member. Although they are called a director, a dummy director is only a figurehead. They exercise no real control over the company, and they have no financial interest in it.
Dummy directors are also known as accommodation directors or nominal directors.
- A dummy director is a voting member of the board of directors, but who acts on behalf of some other non-board entity.
- Dummy directors are most often seen in the context of start-up companies to act on behalf of management until permanent external directors are found.
- Dummy directors are effectively figureheads and exercise no real control over a company.
Understanding Dummy Directors
A board of directors is an elected group of individuals that represent shareholders. The board is a governing body that typically meets at regular intervals to set policies for corporate management and oversight. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors. The board makes decisions concerning the hiring and firing of personnel, dividend policies and payouts, and executive compensation.
Dummy directors are most commonly used by start-up companies that are going public. To meet regulatory requirements, they establish a board of directors by electing a number of nominee directors to serve temporarily, and act on behalf of management, until permanent directors can be found.
As stand-in members of a board, dummy directors would experience a conflict of interest if they sat on the board for any length of time. This is because all board members have legal fiduciary duties to the corporation that they are representing. Board members are expected to act in good faith, with candor and confidentiality, and in the best interest of the corporation.
Usually, the board, once it has been established, includes a mix of company insiders and qualified outsiders with expertise in associated fields. An inside director is a member who has the interest of major shareholders, officers, and employees in mind, and whose experience within the company adds value.
Outside directors, while not involved in the daily operations, should bring an objective, independent view to goal-setting and settling any company disputes. Striking a balance between the two is critical to the success of the board.
Examples of Dummy Directors
In a 2013 case involving Puda Coal, a Chinese company charged with fraud and forging important documentation, a judge ruled that directors appointed by the Delaware-based company were culpable in the fraud. "Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors,” the court said.
In another case in Australia in 2018, a baker was made director of two companies—a horse-training business and an Indian restaurant—to pony up the costs of hiring solicitors for help with his business. The solicitor's business was later found to have evaded taxes to the tune of $100 million.