A law change saying company directors may take into account wider issues than the best interests of their company and shareholders when making decisions is to be debated in Parliament.
The Companies (Directors Duties) Amendment Bill was drawn out of the members’ bill ballot today. It is in the name of Labour MP Duncan Webb, so has the backing of the Labour caucus, which gives it the numbers to progress through Parliament.
It will add to the debate about how directors take into account wider priorities when making decisions.
The bill as drafted only amends the law to say directors “may” consider things such as social outcomes and environmental issues.
The bill’s explanatory note said traditionally companies have been considered as a vehicle for enterprises who have commercial profit as a sole or primary objective.
It said this need not be the case. A company may seek to promote any number of other objectives if the company and its shareholders so decide.
“This bill makes clear that a director, in acting as the mind and will of the company, can take actions which take into account wider matters other than the financial bottom-line. This accords with modern corporate governance theory that recognises that corporations are connected with communities, wider society, and the environment and need to measure their performance not only in financial terms, but also against wider measures including social, and environmental matters.”
The wording in the bill as drafted amends the Companies Act to clarify that a director may take into account recognised environmental, social and governance factors in determining the best interests of the company.
The areas it gives as examples are:
- 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.
- Recognising the interests of the wider community.
The introduction of the bill to Parliament follows a paper by the Institute of Directors and MinterEllisonRuddWatts which looked at the evolving corporate governance landscape in relation to stakeholders.
It called for the government to review the framework for directors’ duties in the Companies Act.
Defining best interests
The paper said under the law directors must act “in the best interests” of their company but the challenge is defining exactly what this means.
The debate is not new. The concept of “B Corporations” has been around for some time.
B Corporations are businesses balancing purpose and profit, which hold themselves publicly accountable for considering the impact of their decisions on their workers, customers, suppliers, community and the environment.
Originally conceived in the United States, where a share price can benefit at the cost of everything else, the B stands for ‘benefit’.
There are an estimated 4,000 B Corps in more than 70 countries including in North America, the United Kingdom, Europe, China, Australia, Latin America and New Zealand.
NZ had one B Corp in 2014, 22 in 2019 and now has 42.
Likewise, boards are giving increasing emphasis to environmental, social and governance (ESG) matters and their relationship to long term performance and value creation.
Corporate reporting is also undergoing significant change, particularly concerning extended external reporting.
Another example of this in New Zealand is the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, which is currently awaiting its second reading.
It will require large entities to disclose their exposure to climate change risk and what they are doing about it. There is general support for the bill in the corporate world, though concerns about how it is being implemented and how it will work in practice.