Bill aimed at direction, purpose

Section 131 of the Companies Act lives in your mind as a director.

It reminds you that you must act in good faith and in the best interest of the company. Hold on to that thought then dust off your dictionary and look up the word "may".

Mine defines it as expressing possibility and also defines it as used to ask for or to give permission. Now enter the Companies (Directors Duties) Amendment Bill, a member’s Bill fronted by Labour MP Dr Duncan Webb.

This Bill has the director community debating. At one end, we have directors who lean towards the invisible-hand, efficient-market theory of Adam Smith and the sole purpose or proper motive being to maximise profit.

This notion comes from the agent principal theory. Shareholders invest their capital, you as director act as agent, with the implication being you deliver a return on capital by maximising profit. Shareholder primacy at its best.

At the other end are directors committed to stakeholder engagement, alignment of interest and broader societal outcomes. For them the word "may" might better be "must". But "may" it currently stands, the Bill is permissive rather than mandatory.

To recap, the Bill says:

“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:

(a) recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi)

(b) reducing adverse environmental impacts

(c) upholding high standards of ethical behaviour

(d) following fair and equitable employment practices

(e) recognising the interests of the wider community”.

And just like the debate, so, too, in real life we see companies operating at both ends. It might depend on who your owners are but for many, consideration of some or all of (a) through (e) is already an existing practice.

As such, some might argue that the Bill is unnecessary. What change will it drive, if many are already considering such factors in pursuit of their social licence?

Some might argue Section 16 of the Companies Act already provides the permission by stating (among other clauses), that a company has “full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction”.

Others may prefer the clarity it brings, that such matters may be taken into account and allowing an entity to respond to influences that facilitate the best interest of the company.

And, of course, clarity counts, because you cannot take (a) through (e) into account if you are not clear on your purpose. And you cannot be clear on your purpose without defining and consulting on the same.

Shareholders and stakeholders alike, they both will have a keen interest in how you define purpose, be it pursuit of profit alone or profit balanced with a social agenda.

Others argue that clarity has in fact been lost. Overlaying societal obligations creates uncertainty in directors’ duties. Add that to your ever growing considerations when you are next undertaking due diligence on an entity looking for governors.

The explanatory note to the Bill reminds us that:

“Companies are a useful legal entity for the conduct of many activities. Traditionally they have been considered as a vehicle for enterprises who have commercial profit as a sole or primary objective. This need not be the case. A company may seek to promote any number of other objectives. It is for the company and its shareholders to determine the purposes of the company. The pursuit of those purposes are the standard against which the interests of the company, and the conduct of its directors, are to be measured”.

The Bill was born from debate over Air New Zealand’s letter of expectations. For some, the letter had gone too far requiring, among other things, best practice workplace relations and commitment to environmental sustainability, yet for others it was incredulous that this was even a debate.

However, debate there was and now the Bill is currently awaiting its first reading in Parliament. With Labour’s majority, it will have the numbers to pass. That said, it has to go through the usual select committee review.

This might be the point at which you put pen to paper and enter the submission process with your thoughts.

Unnecessary, "may" or "must", the choice in the submission is yours, until the law, shareholders or stakeholders choose for you. Irrespective of the outcome, this legislation provides a prompt to engage at your next board meeting on both purpose and what the best interests and success of your company might mean.

 - Trish Oakley is the chairwoman of the Otago Southland branch of the Institute of Directors (IOD). This article is opinion only and not intended as governance advice. IOD is the professional body for directors and is at the heart of New Zealand’s governance community.

 

Comments

Do I invest in New Zealand companies and risk my savings with directors grappling with a cloak of neo-marxist ambiguity, or put it offshore where there are likely to be countries with consistent and stable corporate law?

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