The Companies (Directors Duties) Amendment Bill 2021 (Bill) proposes to amend section 131 of the Companies Act 1993 (Act) to clarify that company directors may take into account recognised environmental, social and governance considerations when determining the “best interests” of a company.
The Bill was drawn out of the Member’s Bill ballot, with MP, Duncan Webb (Labour) in charge of it. It is likely that the Bill will have the numbers to pass through Parliament, subject to the usual parliamentary scrutiny and amendment process.
While the proposed changes to the Act are permissive rather than mandatory and arguably reflect the existing practices of many corporates, explicit clarity on matters of corporate social responsibility is, in the authors’ view, ultimately a win-win for shareholders and stakeholders alike and reform of this nature is only to be encouraged.
The proposed change
Section 131 of the Act states that company directors are required to act in good faith and in the “best interests” of a company.
The Bill provides that a company director, when determining the best interests of a company, may 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.
As it stands, the Bill does not require directors to take these factors into account. It provides that directors may consider these factors when determining the best interests of a company. That is, it is permissive rather than mandatory.
The noted 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.” In other words, the Bill intends to make explicitly clear the current practice of many corporates and drive a change in practice for others.
With savvy, informed and concerned consumers prepared to vote with their dollars, demonstrated corporate social responsibility (fostering brand reputation and consumer trust) is widely understood to create competitive advantage leading to long-term success and profits. That being the case, it begs the question as to whether the explicit clarity provided by the Bill is necessary.
The proposed amendments to section 131 of the Act clarify that company directors are permitted to consider more than just short-term financial results and profit-advancing goals when determining what is in the “best interests” of a company.
As directors are already allowed to consider matters that will lead to a long-term better position for a company when determining the best course of action for a company, the Bill does not change the law. However, if passed, it would make it explicitly clear that matters of the nature included in the Bill may be regarded by directors in formal recognition of the fact that business success may be measured in a number of different ways.
The Bill complements the New Zealand Government’s proposed implementation of a single broad policy to broaden non-financial reporting by requiring and supporting the making of climate-related disclosures by certain financial institutions and supporting related matters, as announced earlier this year (see the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill). This marks a growing recognition that wider factors such as environmental health, social wellbeing, fair and equitable outcomes, and greater inclusivity also contribute to corporate success.
If you have any questions about directors’ duties, please get in touch with our Business Advice Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.