Companies (Directors Duties) Amendment Bill – A shift towards the stakeholder view of corporate governance
On 23 September 2021 the Companies (Directors Duties) Amendment Bill was drawn from the ballot. If passed, the amendments would signal a shift in the underpinning corporate governance theory of company law in New Zealand.
The Bill clarifies that directors may take into consideration “recognised environmental, social and governance factors” (ESG Factors) when acting in the best interests of the company. It provides a non-exhaustive list of such factors, these being:
- Recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi);
- Reducing adverse environmental impacts;
- Upholding high standards of ethical behaviour;
- Following fair and equitable employment practices; and
- Recognising the interests of the wider community.
The Bill achieves this by inserting a new paragraph five to section 131(1) of the Companies Act 1993 (Act). Although a brief addition, the amendment would be significant from a theoretical perspective.
Competing theories as to the “best interests” of a company
Section 131 of the Act requires directors of a company to act in its best interests. The traditional view is that this duty is discharged by acting in the best interests of the shareholders. Section 131 is therefore sometimes interpreted as imposing a duty to maximise profits, providing shareholders with maximum return on their investment. This view is known as the shareholder primacy theory. It has been the pertinent corporate governance theory in both New Zealand and much of the wider western world since the 1930s.
This traditional view assumes that it is always in the best interests of the company to maximise profits. However, with society’s increasing concern about social and environmental issues, debate has emerged as to if companies, as “corporate citizens”, also owe duties to the wider stakeholders that facilitate their existence. These stakeholders include employees, customers, communities and the environment. This school of thought is known as stakeholder theory.
The Bill looks to give statutory legitimacy to the decision making of directors that adopt a stakeholder approach when decision making.
We do not anticipate that the changes proposed by the Bill will have a practical effect on the day-to-day running of companies for these reasons:
- The Bill does not impose a mandatory duty on directors to consider ESG Factors. It simply states that they are permitted to do so.
- Companies may already pursue purposes other than profit maximisation under the current law and many companies already operate on the understanding that it is legitimate to do so. Where shareholders wish to provide clear mandate for such an approach, they may do so by the adoption or alteration of a company constitution to that effect.
- It is becoming increasingly common for directors to consider ESG Factors in their day-to-day decision making as a matter of normal business. This is
- A recognition that stakeholders can have material financial impacts on a company, and that consideration of their interest will ultimately maximise shareholder profit and the long-term viability of the company;
- The increasing importance of corporate social responsibility in building
- Demand from consumers for ethical products and sustainable investments; and
- The increasing prevalence of non-financial external reporting standards.
Regardless of its practical necessity, the Bill would clarify a recognised ambiguity in the law. This clarity would give directors useful guidance as to matters they may consider when furthering the best interests
of the company.
Approaches around the world
New Zealand would not be the first country to endorse the stakeholder approach at law.
The United Kingdom has required directors to have regard to ESG factors since passing the Companies Act 2006. Section 172 of that act imposes a mandatory duty on directors to “promote the success of the company” by taking into account similar considerations as those listed in the Bill. While consideration is in the UK’s case mandatory, the weight that directors must give to the factors is subjective. It is in fact legitimate for directors to give no weight to them at all, removing much of the teeth of the mandatory duty.
The Supreme Court of Canada has expressly examined the meaning of “acting in the best interests” of a company. It found that, when determining whether directors are doing so, it may be legitimate, given all the circumstances of the case, for directors to consider the interests of shareholders, employees, suppliers, creditors, consumers, governments and
Australia chose not to adopt such an approach in 2006. It examined the United Kingdom’s implementation and reached the view that imposing a duty to have regard to various factors without guidance as to how those interests are to be weighed, prioritised and reconciled was ultimately counter-productive. Australia considered that the UK’s approach simply made directors less accountable to shareholders without actually enhancing the rights of stakeholders, as stakeholders were not afforded any enforcement mechanisms.
The Bill is currently awaiting its first reading in Parliament. With the Labour Party’s majority in the house, it will likely have the numbers to head to the Select Committee stage at which stage submissions would be invited. The Member of Parliament behind the Bill, Dr. Duncan Webb, Labour MP for Christchurch Central, has indicated that the Government is open to making it mandatory to consider ESG Factors if there is public appetite for such a change at the
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