Proposed directors’ duties bill ‘unnecessary’, with unintended consequences

James Cooney, Jesse Wilson & James Gibson

A Parliamentary select committee is considering a proposal to amend the duty of directors to act in the best interests of the company. The Companies (Directors Duties) Amendment Bill would amend s 131 of the Companies Act 1993 to provide that directors may take into account recognised environmental, social and governance (ESG) factors when determining the best interests of the company.

We consider the bill is unnecessary because directors can – and do – already consider ESG matters where relevant and appropriate to assessing the best interests of the company. While well-meaning, the bill may have unintended consequences, including an increased litigation risk for directors, encouraging a check-box mentality in decision-making and increasing compliance costs.

Proposed by MP Dr Duncan Webb, the bill would amend s 131 by inserting the following new subsection: (5) 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:

■ 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; and

■ recognising the interests of the wider community.

Our submission to the Economic Development, Science and Innovation Committee is available here

Key points: Inadequate problem identification

Is there an identified problem that the proposed change would solve? The stated purpose of the bill is to make clear that a director “can take actions which take into account wider matters other than the financial bottom-line”.

In our opinion, there is no current issue with directors doing so, including by having regard to ESG considerations when acting in what they believe to be the best interests of the company.

That is because directors are given the latitude, through a subjective test and acknowledgement of business judgment, to consider what they believe to be the company’s best interests. This includes taking a long-run view. In our experience, many boards of directors already have regard to these considerations.

Risk of unintended consequences

Although the bill appears well-intended, it risks unintended consequences. These include:

■ increased litigation risk for corporate directors by creating a potential foothold for legal challenges to directors’ business judgment;

■ the possible emergence of a “check-box” mentality in board decision-making; and

■ increased compliance costs.

In particular, we see a risk that a court might interpret the express permission for directors to consider the “recognised” factors as suggesting an implicit hierarchy of considerations relevant to the best interests of the company or as suggesting in some circumstances a director must take into account such factors as relevant considerations. This may give rise to the risk of liability for boards of directors that cannot evidence that they sufficiently considered such factors in the context of otherwise good-faith decision-making.

Suggested amendments

If the bill is to proceed, we consider it would be desirable to make certain drafting changes, including:

■ aligning the wording with the existing subsection 131(1) of the Companies Act to avoid any implication that there may be only one correct view as to what the best interests of the company are;

■ removing the word “recognised”, which may inadvertently undermine the good faith, subjective business judgment inherent in s 131 and create uncertainty and conceptual confusion; and

■ clarifying that the listed considerations are not exhaustive and that there is no particular hierarchy among those listed considerations. ■

James Cooney, Jesse Wilson and James Gibson are partners at Bell Gully. Amon Nunns, Alix Boberg and Tim Shiels also contributed to this work ■