The NZ Companies (Directors Duties) Amendment Bill: Much Ado about Nothing?

A proposed amendment of the Companies Act 1993 (the ‘CA 1993’) is currently under review before the Economic Development, Science and Innovation Select Committee of the New Zealand Parliament. This is the Companies (Directors Duties) Amendment Bill (the ‘Bill’) that attempts to modernize the existing approach to the ‘company’s interests’ by enabling a broader consideration of non-shareholder constituency interests when directors exercise corporate power.

While the debate about whether public companies exist to deliver returns for shareholders or in service of a broader constituency has been going on for decades, it reignited in Aotearoa New Zealand after Rob Everett (the Financial Markets Authority CEO at the time) argued in a speech delivered in 2019 that ‘the Milton Friedman model, where the responsibilities of a listed company board are primarily aimed at returns for shareholders, and the competitive dynamics of the ‘market’ itself being able to weed out those who do harm, is broken. Actually, it’s not broken, because it was never a valid or sustainable model in the first place’. This vision of capitalism that repudiates the shareholder-first orthodoxy generated passionate academic and policy disputes (with some tangible consequences to the NZX Corporate Governance Code relating to disclosure of environmental, social and governance factors (ESG)) which, eventually, led to the legislative initiative discussed in this note.

The Bill, sponsored by Labour MP and chair of the Finance and Expenditure Committee Duncan Webb, was drawn out of the members’ bill ballot in September 2021 and proposes only one change to the existing regulation of directors’ duties. It does not repeal section 131 of the CA 1993 that requires that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company. It simply inserts a new subsection (5) that enables directors to take into account recognised environmental, social and governance factors when determining the best interests of the company. Then follows a list of five factors directors may consider: the principles of the Treaty of Waitangi that  provides a constitutional framework for the ongoing relationship of partnership between the Crown and Māori; the environment; ethical behaviour; equitable employment practices; and the interests of the wider community.

The proposed amendment appears to be consistent with (but perhaps not as radical as) the spirit of the authoritative claims put forward in the ‘Statement on the Purpose of a Corporation’ in 2019 by the Business Roundtable and the Davos Manifesto, according to which the purpose of the corporation involves a fundamental commitment to all stakeholders. However, beyond any possible consideration on the ‘illusory hope’ of stakeholderism, in its current formulation, it seems to be largely redundant and ineffective.

As pointed out by the Supreme Court in Madsen-Ries and Levin as liquidators of Debut Homes Ltd v Cooper [2020] NZSC 100, the ‘company’s interests’ under section 131 CA 1993 do not necessarily coincide with the interests of the shareholders and ‘courts are not well equipped, even with the benefit of expert evidence, to second-guess the business decisions made by directors in what they honestly believed to be in the best interests of the company’ (at para 112). This effectively means that directors in New Zealand companies, even if not set out in the company’s constitution, can already considers factors such as those in the Bill in their actions, if they believe that those factors would promote the best interest of the company.

Moreover, despite the fact that the Bill seems inspired by the model of section 172 of the Companies Act 2006 (UK), the current drafting does not introduce the ‘enlightened shareholders value approach’  to the company’s interests in New Zealand. This is because it does not clearly establish as a default rule the priority of members’ interests in requiring that directors act to promote the success of the company and does not impose any mandatory requirement on directors to have regard to other interest groups when considering what promotes shareholder interests. It is at best an educational tool for directors who ‘may, when determining the best interests of the company, take into account recognised environmental, social and governance factors.’

The Select Committee has time until 9 May 2023 to make its report to Parliament. It is difficult to predict whether it will recommend to proceed, especially in the light of more pressing priorities during an election year.

Matteo Solinas is an Associate Professor of Commercial Law at Victoria University of Wellington.