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In defence of the proposed changes to directors’ duties

27 Oct 2022

| Author: Steven Moe

Changes are now before Parliament which, if passed into law, will see an amendment to s 131 of the Companies Act. That section is the foundation of the other duties as it contains the well-known phrase that directors: “…must act in good faith and in what the director believes to be the best interests of the company”.

The proposed changes (set out at the end of this article) are positive and will make clearer the matters directors should consider when deciding how to act in the best interests of the company. However, some argue that change is not needed, as laid out in this recent ADLS article. I’d like to tease out that line of argument – that directors already take into account the ESG factors laid out in the bill currently before Parliament.

There is an intersection near where I live which did not have a stop sign. It was notorious for crashes. Why? Drivers new to Canterbury’s rural roads are unaware that they need to slow down, stop, consider the situation and then move forward. And sometimes we need reminders of what a local might think is obvious. A simple solution was to add signs and even some flashing lights at the intersection to alert people that they needed to slow down and think.

It’s the same with s 131. What we are talking about is some “signage” that makes it clear that before making decisions directors should slow down, consider many perspectives and only then move forward. The signs are not for the “locals” (lawyers who have studied and specialise in what director duties are) but instead for directors who are not familiar with their statutory duties or what they need to consider.

Amending s 131 and upgrading our understanding of directors’ duties will be a helpful tool to start more conversations and raise awareness of factors to take into account. We need paradigm-shifting thinking to deal with the major issues being faced in our society, not just more of the same approach that got us here. The proposed amendment is a small step in the right direction but just the first of many that will be needed.

We have to wake up to the severity of issues such as climate change and start pulling on all the levers we have if directors are to consider relevant factors when making decisions.

On the agenda? 

Arguing that directors are already doing this will not be viewed kindly by history. Change is needed. Some factors in the new bill include the principles of the treaty and the environment and I don’t believe these are yet points which most boards are really wrapping their heads around. As an example, it is only from 2023 that our largest companies (a very limited number) will be forced to consider climate-related impacts in changes the XRB is about to release.

I can understand how such perspectives could have been shaped for lawyers and commentators who consistently deal with NZX-listed or very large companies. These entities have the budget to engage consultants and lawyers and consider things more. Of all the entities in our market, they are the most likely to already take into account wider stakeholders and the impact of their decisions on consumer choices relating to their brands. But here is the reality: boards could consider these points, but they don’t – at least, not yet. They need some signs.

‘Genuine surprise’ 

According to Companies Office records, on 30 September 2022 there were 710,364 registered companies. Think about the vast majority of SMEs (those with fewer than 20 employees) which, according to Stats NZ, represents 97% of all New Zealand enterprises.

Just last week I was facilitating a session for 25 directors and they were all genuinely surprised at this proposed change and the possibilities it opens up for conversations around the boardroom table. I’m willing to bet that the factors laid out in the bill are not on the agenda for many of those hundreds of thousands of boards – but they should be.

It is for these smaller companies that putting up some clear signage will have the most direct and immediate impact – a sign that will cause them to slow down and consider all angles to an issue when making a decision. But is it going too far? And will it lead to great confusion for judges to interpret? I doubt it. The change requires only that directors “may” consider a list of factors. Unlike a similar provision in the UK, there is no “must”. The sky has not fallen over there, despite the equivalent section being included since 2006.

What is proposed here is not world-leading. If anything, it is a minor catch-up and I talked about that with the instigator of the bill, Dr Duncan Webb, here on seeds podcast. Perhaps this might be recognised as a starting point, heralding a new way of thinking about stakeholder governance.

At some point we may even be ready to engage further with suggestions in this report a few of us wrote on Structuring for Impact: Evolving Legal Structures for Business in New Zealand. We live in a world where we need to reimagine the role of business. We need to consider questions of moral imagination as well, like “when is enough, enough?” How can we empower and incentivise founders to pursue both profit and purpose? And if a company consistently profits from producing single-use plastic items to sell sugared-up water to children that impacts their health negatively, then are we okay with that?

The law needs to constantly be evolving to help provide guidance – signposts along the road – that will help our directors to navigate through issues safely. Like the Canterbury intersection with so many crashes, the proposal will help directors as they exercise their duties and provide clearer instruction on what they should be considering. This will be a helpful shift towards a future where this argument is no longer relevant, where boards automatically consider all these and other issues. Such a day has not yet come.

The proposed changes to be added to s 131 of the Companies Act 1993:

“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:

  • 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.” ■

Steven Moe is a partner at Parry Field Lawyers ■

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