The Companies (Directors Duties), Amendment Bill is at risk of pleasing nobody. Should it go back to the drawing board?
The one-page bill is designed to amend s 131 of the Companies Act to make it clear that when directors are considering what the best interests of the company might be, they may take into account environmental, social and governance (ESG) factors. Some examples are given:
- recognising the principles of the Treaty of Waitangi;
- reducing adverse environment impacts;
- upholding high standards of ethical behaviour; and
- following fair and equitable employment practices.
But the private member’s bill, sponsored by Christchurch Central MP Duncan Webb, is copping flak on all sides, from those who think it hasn’t gone far enough to those who believe no changes are needed. Unlike the UK, where similar duties are compulsory, New Zealand’s law simply allows directors to consider a list of ESG factors.
Chapman Tripp partner Roger Wallis sits in the “no legislation necessary” camp and doesn’t mince his words, describing the bill as virtue signalling. “It’s a huge waste of parliamentary time. The bill needs serious work to fix it up,” he says. “I suspect it will probably get sent to a select committee, but only to avoid embarrassment. A more benign view is that [Webb] thought he was doing something else, [and] probably doesn’t realise that he’s potentially going to create havoc.”Rather than clarifying the law, the bill might have the opposite effect, say Wallis and fellow Chapman Tripp partner Michael Arthur.
Wallis’ main point is that the bill is trying to fix an issue that doesn’t exist because it assumes the primary purpose of companies is to make profit. “That’s never been the case. It’s never been the law that companies are there to make profit and the directors have duties to try and ensure that. Companies are an incredibly flexible form of business organisation. [They] are legitimately used as a corporate form for not making profit, for social purposes or to merely hold assets: from doing nothing at one bookend through to running quite elaborate businesses at the other.”
Wallis has four main arguments against the bill. Primarily, he says it’s not necessary. It’s clear from case law that directors can take into account whatever they think they need to in order to comply with the duty to act in the best interests of the company.
“[When] making a decision, you’re allowed to take account of impact on the environment, impact on employees and other [stakeholders] that a company might interface with. What you’re not allowed to do is act in a way that’s detrimental to the best interests of shareholders. But it’s a balancing exercise, and [the ESG examples in the bill] are legitimate things to take into account, but not mandatory. So the existing law more than adequately deals with that concept. That’s why we say it’s a complete waste of time.“
Wallis is also concerned that judges might misinterpret the legislation. “Our second concern is that it will cause more harm than good. One of the dangers of dropping into legislation an unnecessary list of things to think about is the courts might latch on to that. Even though it says the directors ‘may’ take these things into account ….there is a risk that some judge might be persuaded to interpret ‘may’ as ‘must’. If that were to arise, then that would be a bad development.”
Third, Wallis says it’s not a section of the Companies Act that’s crying out for amendment. The Mainzeal litigation highlighted the sections related to trading recklessly or trading while insolvent as being the areas in need of change. “Those sections are seriously deficient but Dr Webb’s bill doesn’t touch on them.”
Finally, he says the factors listed in the bill would be better dealt with through specific legislation. “The idea that you should take employees’ interests into account sounds uncontroversial. But if there’s a problem, the way to fix that is not by amending the Companies Act [but via] employment legislation to make sure that workers’ rights are enforced, or the other way, depending on your political perspective. Don’t try and put it back on directors to try and fix up.”
Buddle Findlay senior solicitor Emma Geard has written about the bill for advocacy group Lawyers for Climate Action. In her opinion, the Bill is not the best way of adapting the legal and governance frameworks needed to transition to a low-emissions economy.
If it were to pass, she says, some directors might sit up and take notice. “But my suspicion is that people are actually acting based on their political views.” They either consider maximising profits as being in the best interests of companies, or they don’t.
Directors’ duties are not the main problem, she says. “Directors have a lot of discretion at law. They can maximise profits, but they can also choose to prioritise minimising environmental degradation and commit significant resources to transition planning.” She also points out that directors’ duties are seldom enforced in the absence of insolvency.
The bill won’t force directors to minimise negative impacts. It would simply clarify what they can consider under the existing law when exercising their duties. “The best change we could make to directors’ duties is to clarify that directors must act in the long-term interests of the company, rather than listing things they could take into account if they wanted to. The focus on short-term profits has proven to be problematic,” Geard says. “Probably more impactful than changing directors’ duties would be initiatives to improve governance practices in this area and, potentially focusing on the duties of institutional investors instead of the companies they invest in.”
Although not mandatory, the bill’s provisions could have benefits in encouraging cultural change in companies, she says. “Something we have discussed at Lawyers for Climate Action is [whether] there is a cultural element to [the bill].” “We do know that, for example, [in countries] where there are similar but better clauses in the equivalent legislation, they are miles ahead of us in terms of taking more rapid action in respect of climate change.” Geard says she wouldn’t be opposed to taking the UK approach of mandatory duties.
Parry Field Lawyers partner and Edmund Hillary Fellowship Fellow Steven Moe, who helped co-author the Impact Investing report, supports some aspects of the bill. In an opinion piece published by Stuff, Moe said before weighing in on how the bill was going too far, critics should consider that it’s in line with developments overseas.
He cites the UK example, where since 2006 the requisite legislation includes a list of considerations for directors to have regard to such as the employees, customers, suppliers, the community and the environment. The UK’s proposed Better Business Act that aims to make the balancing of “people, profit and planet” a core issue for directors would make the requirements more rigorous. “There may be tweaks to the New Zealand proposal which could incorporate some of these ideas and jump over a generation of thinking to where the debate eventually leads,” Moe says.
Russell McVeagh partner Joe Windmeyer is also scratching his head over the bill. In legal language, he says, 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.”
Any modern company considers how it might last for the long term, he says. “Clearly, the public will not be buying from me if they don’t believe I’m an ethical employer and believe that I do the right thing for the environment, etcetera.”
Windmeyer refers to the Institute of Directors’ white paper released 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. Acting for the benefit of stakeholders creates brand reputation, a competitive advantage leading to stable long-term profits.”
Windmeyer argues, however, that change to existing law is not needed to achieve 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 s 131 duty already allows directors to consider the longer term, and not just focus on short-term financial results.
Christchurch Central MP Duncan Webb, sponsor of the bill, says the crystallising factor that led him to draft the bill was a view expressed in Parliament about Air New Zealand by Act party leader David Seymour.
Seymour said Air New Zealand had a legal obligation to maximise profits and the argument that the company should take into account matters such as climate change and good workplace relations was relevant only insofar as these factors contributed to increased dividends to shareholders, Webb says. “It was a pretty repugnant speech. I’m a lawyer and I’ve taught this area and I’ve practised in company law. I know that the Companies Act in a technical reading permits companies to do these sorts of things [listed in the bill] and it’s a pretty flexible model for a legal entity.
“But the fact of the matter is that there is this quite deeply embedded approach, which comes out of a neoliberal view of economics, that everything is transactional and that ethics and purpose have no place when we’re talking about matters of finance and economics. It’s deeply wrong.
“My view of what legislation can do is a little bit broader, given my parliamentary experience, as well as my experience as a lawyer and a professor of law. It can be that it has a political purpose, as well as an enabling purpose. And so, what this is doing is clarifying the existing powers and saying, ‘go forth and do this, you are encouraged’
It’s really giving licence to directors, and the Institute of Directors is very clear that this is good corporate practice. But this is now saying that Parliament, the highest legislative body of the land, recognises and encourages this kind of corporate behaviour and is aligned with what good directors do already.”
Webb welcomes the debate. “I’m heartened that we’ve got, on the one side, the kind of black-letter lawyers who think the sky is going to fall and on the other hand I’ve got Steven Moe and the Lawyers for Climate Change saying this should be obligatory.” In respect of the Companies (Directors Duties) Amendment Bill, the Institute of Directors says it welcomes the debate as part of wider changes to governance legislation as laid out in its submission on the future of business. ■