Will Letting Directors Consider Environment See Change?

Business

New Zealand is set to take a more conservative view than the UK on firms’ environmental and social obligations, in a perfunctory new legal clause

Writing a bill to enable business leaders to consider more than just profit, Dr Duncan Webb wanted something brief that could be unilaterally supported across Parliament – something he didn’t achieve.

The meat of the Labour MP’s member bill, pulled last year, was a little over 100 words long and would amend the Companies Act to say directors “may” consider Te Tiriti o Waitangi, reducing environmental impacts, upholding ethical behaviour, interests of the wider community and fair employment practices when determining the best interests of a company.

On one side, Webb’s bill was criticised as unnecessary by the National Party and as, in the view of Act MP Damien Smith, “rooted in Marxism”, while on the other side, climate activists believe it hasn’t gone far enough.

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Currently, the Companies Act only requires directors to act in the best interests of the company.

For many, this translates to Milton Friedman’s neo-liberal idea that the sole purpose of a company was “shareholder primacy”, which in plain English means to make money and provide a return to its shareholders.

Webb wanted to clear up this notion following a kerfuffle over a letter of expectation the Minister of Finance sent to Air New Zealand which laid out expectations beyond returning a profit to its majority shareholder.

Submissions

Submissions on the member’s bill closed last week.

Lawyers for Climate Action’s submission said it supported the bill as useful clarification that directors aren’t prevented by law from taking account of non-financial factors when determining the best interests of a company but that it didn’t go far enough to achieve a material change in corporate behaviour needed to address the climate emergency.

The lawyers group did however request climate change should be expressly included outside of the environmental impacts umbrella and requested considering the factors be an obligation rather than a possibility.

Similarly, director and environmentalist Richard Lauder’s submission said the choice of the word “may” in the bill didn’t obligate anything, meaning it would achieve little.

Instead, Lauder believed a requirement to do no harm (where practicable) would do far more to improve the considerations of directors in their duty to act in the best interests of their company.

The Institute of Directors’ (submission didn’t take a stance on whether the amendments should be pursued as it believes the existing legislation is permissive.

The Institute said directors would benefit from greater guidance being included in the bill and called for the establishment of an independent working group to review the Companies Act, which turns 30 this year.

A line in the sand

Speaking to Newsroom, Dr Duncan Webb, the MP for Christchurch Central, said it was a move in the direction of much greater corporate social responsibility.

“If you look at it from a technical point of view, you could say it’s a nudge and a tweak, but philosophically it’s actually quite a significant shift to say that directors, not in a legal sense but in a good governance sense, ought to look at much wider factors, than perhaps they have traditionally considered relevant.”

Webb said the language in his bill didn’t go as far as overseas comparisons such as the United Kingdom, “I was keen to have a bill which would be broadly supported, not just in Parliament, but within the director and business community, and I think this does that.”

Rather than merely permitting consideration of the environment and ethical behaviour, the UK’s Company Act requires directors to consider “the impact of the company’s operations on the community and the environment”.

At this stage, Webb’s bill has support from Labour, the Greens and Te Pāti Māori but is opposed by Act and National.

“I’ve got a small number of people saying, ‘This is madness, why are you fiddling with something that works?’ but the predominant feedback I’m getting is people who are saying, ‘Nice idea, but you haven’t gone nearly far enough. It should have had to be mandatory.’ I don’t think it makes a lot of difference to be perfectly honest.”

Webb said having the factors included in the Companies Act would mean if a director didn’t lend some time and thought to it, they couldn’t be considered competent.

He said he understood where the like of LCANZ were coming from, but harder language than “may” would create a closed list of things that were in and out, “This is intended to enable directors to sit back and say, what are the values of this company? What is the purpose of this company? And in light of that, what are the considerations we should bring to bear on any decision we make?”

Two camps

Having served on a number of boards, including as chair of Tourism Industry Aotearoa, Lauder said directors were divided into two camps, “One camp of directors already does all the stuff that’s indicated by Duncan Webb’s proposed amendments. They’re already looking at the environment, they’re looking at social impact, they’re looking at the broader impact of the company on society and the planet.

“But you also get a whole lot who just believe in that shareholder primacy mantra, that their job is to serve the best interests of the shareholders, which obliges them to do anything to generate shareholder value so long as it’s legal.”

He said that so long as its legal way of thinking saw directors working to minimum standards of legislation or regulation to achieve the max shareholder value and meant words like “may” meant very little.

Useful clarification

LCANZ president Jenny Cooper KC said while the group would have liked to see more out of the legislation, it was still useful.

“There can, in some quarters, be a bit of an old-fashioned view that the best interest of the company just means profits for shareholders. We think it’s useful to have the clarification that’s not the case.”

Cooper said if the legislation was to realistically go further than its current form it would require far more work, “The message we are hoping the select committee will take away is okay, great do this, but also start work on something more fundamental and far-reaching.

“This isn’t, we’ll do this and then the job’s done for the next 10 years.”

Cooper believes the Government should be looking at moving our Companies Act closer to the UK’s model.

“The UK has done a really good job of reducing emissions, certainly well beyond New Zealand. We actually haven’t even started really reducing our emissions at all in any meaningful way.”

She acknowledges it’s difficult to point to how much of that stems from the directive.

“I’m not aware of any concerns from the UK over it and in fact, there’s a big push at the moment to strengthen it further down that track with more explicit obligations.

“The UK is a country we look to; our company law comes from a UK model originally. It seems to be happily proceeding down that path. So why shouldn’t we?”

Institute of Directors governance leadership centre general manager Guy Beatson said there needed to be an ongoing focus on a variety of issues in companies driven by a holistic approach.

“If you’re taking a long-term view, rather than just short-term profit maximisation over the next quarter, directors and governors need to be looking at the wider context they are operating in, which includes climate change, environmental management issues and social issues and so on and so forth in the context of best practice.”

He said there was an argument that the Companies Act was already permissive and didn’t go into detail on what the best interests of a company were but said there was no doubt that had largely been interpreted to be the bottom line.

“The legislation on its own is not enough. You don’t shift corporate behaviour, simply on the basis of simply going after the directors. You’ve got to take a much more holistic view of that and a cross-policy process rather than just one single thing.”

That said, Beatson believed most directors were heading in this ESG-focused direction already.

In IOD’s most recent Director Sentiment Survey, changing customer expectations, climate change and environmental issues and changing community expectations were the three top trends identified by directors as commanding future attention.

Beatson said that didn’t necessarily mean they were acting on those factors to the fullest extent, but it did mean it was on their radar.

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