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by Stephen on May 11th, 2023

In a hopeful turn of events this week, the Economic Development Select Committee has reported that it was unable to agree that the Bill should pass. 

Instead, it has recommended amendments to the Bill – should it be determined by the (whole) House that the Bill be passed.

As a recap, the Bill is a member’s bill that proposes an amendment to section 131 of the Companies Act 1993 – the (fundamental) duty of directors, that when exercising powers or performing their duties, the director of a company must act in good faith and in what they believe are the best interests of the company.

The Bill would add new section 131(5) as an ‘avoidance of doubt’ provision – including a non-exhaustive list of five ESG matters that a director may take into account when deciding what is in the best interests of the company.  In doing so, the architect of the Bill submitted that this was to make clear that directors can take actions which take into account wider matters than (just) the financial bottom-line.

Proposed new subsection 131(5) could be shortened and still achieve its objective

In reporting back, the Committee noted submissions that the current law (which is general and principles-based and does not limit what can be considered by directors) already allows a director to consider ESG factors when deciding what is in the best interests of their company.

The Committee also accepted the concerns of submitters as to the Bill risking unintended consequences.  For example, because it listed specific ESG factors and gave the impression that these factors should carry more weight than others.  The reference to the principles of Te Tiriti o Waitangi also risk confusion, because the relationship between the Crown and Māori is governed by Te Tiriti – and does not typically include other individuals or private entities.

The Committee also acknowledged submissions about the risk of creating inconsistencies within the Companies Act and with other legislation – and noted that non-legislative alternatives (such as Government-provided guidance or training materials).

The Committee agreed with the concern of the architect of the Bill that help was needed to dispel uncertainty about a directors’ duties in cases where financial or profit-related considerations appear to be in conflict with ESG-related ones.  However, it proposed a shortened version of the proposed new subsection 131(5), removing the list of ESG factors, and simply providing:

(5)        To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit.

The National Party members of the Committee, whilst agreeing that there is benefit in directors taking into account ESG factors, noted that directors already have existing obligations under their fiduciary duties.  As a result, the minority concluded that the Bill is unnecessary.   In doing so, they noted the opposition to the Bill by the New Zealand Law Society and the (Parliamentary) Legislative Design and Advisory Committee.  In doing so, they echoed the Law Society submission cautioning against ad-hoc changes to the directors’ duties regime.

Next steps

The Bill seems destined for a second reading and then it seems likely to be debated by a ‘committee of the whole House’ – at which the change recommended by the Committee will be considered.

Whilst such ad hoc changes to the fundamental elements of company law are problematic and, in this case, (IMHO) unnecessary, this will also give new impetus to those sector groups who seek to read “may” as “must”.  For example, by giving greater emphasis to the body of opinion that company directors should be starting on the path to identify, assess and manage environment-related risks, particularly if the company’s business model is dependent on the environment.

In turn, this gives rise to the sort of concerns recently highlighted by the Chief Justice (in the context of changes to resource management law) about the impact of pathfinder litigation as interested parties seek to develop a better understanding and/or test the boundaries of the legislative changes.

From where I sit, the proposed alternative subsection 131(5) is likely to be accused of suffering from the same defects as the original drafting – particularly the lack of clarity.  Once again, if real progress is to be achieved on issues such as reducing adverse environmental impacts then clear legal obligations (coupled with efficient enforcement mechanisms) are likely to have a more realistic chance of achieving that goal.  More opaque drafting does not.

In any event, I question why specific legislative objectives should be slipped in through the side door of general, principles-based, companies legislation.  This seems to compound the risk.  It is a point made in submissions and not adequately addressed by the Committee. 

Hopefully, the issue will be grasped when the Bill returns to Parliament.

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