Matter of opinion
Don’t follow the money – a new Bill confirms wider priorities for corporate New Zealand
A Labour member's Bill drawn from the ballot last week brings a focus on the evolving world of corporate governance, reflecting not so much a change to the legislative framework, but a clarification of current practice and future direction.
Under section 131 of the Companies Act, company directors are required to act in good faith and in the best interests of the company. The Companies (Director Duties) Amendment Bill, introduced on 23 September 2021, amends this section providing that, when determining what is in the best interests of a company, a director may take into account "recognised environmental, social and governance factors". Examples of these factors are then listed as follows:
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recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi);
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reducing adverse environmental impacts;
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upholding high standards of ethical behaviour;
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following fair and equitable employment practices; and
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recognising the interests of the wider community.
While on its face this proposed amendment may seem radical, as the Bill states, its purpose is "to avoid doubt". That is, it is intended to clarify the existing legal position where the best interests of the company can include multiple factors. Contrary to the traditionally held view, there is no legal requirement that directors must prioritise immediate shareholder profit above all else. To the extent there is any potential for a court to rule out wider considerations under the best interest test, this is increasingly unlikely as stakeholder's expectations of companies environmental and social performance are inextricably linked to long-term financial sustainability and value creation.
Given this, the Bill should not substantively change the current legal position for directors or the ability of companies to focus on social good outcomes. As drafted, the director's duty remains to the shareholder (the best interests of the company) rather than to stakeholders. Companies can, and already do, use purposes or stakeholder clauses in constitutions to include social good objectives.
In New Zealand, we already have a number of "B corporations" which are companies that certify against criteria for meeting the interests of shareholders and those of wider society and the environment. In terms of current practice, the NZX Corporate Governance Code introduced content on stakeholders and environmental and social factors in 2017 and is expected to expand this content when reviewed later this year. Companies are also increasingly required to report against social and environmental factors, while sustainable finance is expected to become a growth area.
However, if passed, the Bill may nevertheless lead to, or accelerate, changes in director and company behaviour. To the extent there is an ongoing belief that corporate directors are required to maximise shareholder short-term profits, the proposed amendment makes clear that this is not correct. It is also possible that the amendment would create greater expectations from stakeholders that directors will consider, as a matter of course, the specific factors listed when determining what is best for the company. The clarification could also lead to reconsideration of practices that prioritise short-term share increases, for example, executive compensation tied to annual shareholder returns.
At the very least, the Bill will provide a platform for debate on the appropriate legal framing for modern corporate governance in New Zealand. This is in line with global developments where the shift from shareholder to stakeholder, from short-term to long-term, is being increasingly examined and explicitly clarified in codes, guidance and legislation.
As a Labour's members Bill, the proposed amendment will have caucus support to the Select Committee. It is also expected to have some support from the business community – it followed a joint report from the New Zealand Institute of Directors and MinterEllisonRuddWatts on stakeholder governance that recommended legislative review of director's duties. The Bill will invariably raise questions whether the amendments go far enough, whether specifying factors in legislation supports or undermines effective governance and/or whether a more comprehensive policy review is first required.