Last week the Companies (Directors Duties) Amendment Bill (Bill) was drawn out of the member's bill ballot and introduced to Parliament. The Bill proposes an amendment to the Companies Act 1993 to make it clear that, when a director determines what is in the best interests of the company, the director may take into account recognised environmental, social and governance factors.
With the backing of Labour's majority caucus, the Bill will have the numbers to pass through Parliament. However, it will need to proceed through the usual parliamentary process, including select committee review before doing so. It is hoped, when doing so, it will be subject to scrutiny and subject to amendment as noted below.
What is being proposed
The Bill is very brief, proposing only one change to the Companies Act 1993, which is to insert a new paragraph into section 131, concerning the directors' duty to act in the best interests of the company. This Bill proposes to amend that section by adding the following:
To avoid doubt, a director of a company may, when determining the best interests of the company, take into account recognised environmental, social and governance factors, such as:
(a) recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi):
(b) reducing adverse environmental impacts:
(c) upholding high standards of ethical behaviour:
(d) following fair and equitable employment practices:
(e) recognising the interests of the wider community.
As it currently stands, the Bill does not require directors to take recognised environmental, social and governance factors into account. It is permissive, rather than mandatory. It provides that these factors may be considered by directors when determining the best interests of the company and provides some examples of such factors.
Rationale for the proposed amendment
It was noted that the purpose of the Bill is to "make clear that a company director, in acting as the mind and will of the company, can take actions that take into account wider matters other than the financial bottom-line. This may include matters such as the principles of Te Tiriti, environmental impacts, good corporate ethics, being a good employer, and the interests of the wider community".
That is, the Bill is intended to make explicit and clear, what we have seen to be the existing practice of most corporates. In legal language, it is a declaratory reform rather than one that will drive a change in practice. In such cases, you can always question whether a reform is therefore necessary, but some may welcome the clarity. A separate question, which we come to below, is whether the proposed reform will achieve its aim.
Section 131, which the Bill seeks to amend, was itself, by contrast, somewhat radical when introduced. It provided a duty for directors to consider the best interests of "the company". Previously, the duty was believed to be owed to the shareholders of the company. By extending the duty, this has led to a distinction that "while solvent", it is the shareholders who are the ultimate residual claimants, and therefore, business should be transacted with their interests in mind. However, when a company is insolvent (or near insolvent), it is the creditors who benefit from this duty. Further, the courts have found times when the interests of other stakeholders, such as employees, need to be had regard to. What the directors must consider alters depending upon the circumstances then facing the company.
We note that The Institute of Directors released a white paper in July calling for a review of the corporate governance landscape in New Zealand. The white paper sets out that acting in the interests of stakeholders is also good for shareholders, as acting for the benefit of stakeholders creates brand reputation – a competitive advantage leading to stable long-term profits. We agree with that view but, as noted above, we do not believe that it requires any change to the existing law to lead to this result. In our view it must be accepted that no company can succeed in the long term if it does not have regard to matters such as employees, customers, suppliers, and the communities in which it operates. The existing section 131 duty already allows directors to consider the longer term, and not just focus on short term financial results. Such matters are had regard to if it is believed that this will lead to a long-term better position for the company and therefore its shareholders.
Will the Bill achieve its aim?
However, if it is believed that the Bill is necessary, and that explicit clarity on this point is desirable, we trust it will be subject to further scrutiny to consider matters such as:
Whether the section should more closely follow the UK provision which makes it clear that:
the factors must be considered; but
they are considered for the purpose of promoting the success of the company for the benefit of its members as a whole (that is, the matters are not seen as a separate objective in and of themselves, rather they are considered with the objective of leading to the ultimate success of the company).
Clarify what is meant by the term "recognised" factors. It suggests that the factors being considered must be "mainstream" to be considered, but who is to determine that at any particular point in time?
By only referring to selected matters, does this mean other matters cannot be considered?
The amendment refers to the duty to act in the best interests of the company, but much of section 131 negates that duty to allow a director to have regard to the best interests of a holding company or, in the case of a joint venture, a shareholder. Can similar considerations as are being proposed by the amendment be applied when considering what is in the best interests for those parties?
If clarity is the aim, these are some important questions to ask. It must be remembered that the duty in section 131 is not owed to the shareholders of the company, but to the company itself. Therefore, no shareholder may bring a personal action against the directors for failing to comply with the duty in section 131.
If you would like to discuss how this might affect you or your organisation, get in touch with one of our experts below.