The Companies (Directors Duties) Amendment Bill (the Bill) would amend section 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 that 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, we consider that the Bill may have unintended consequences if passed – including increasing litigation risk for directors, encouraging a “check-box” mentality in decision-making, and increasing compliance costs.
Our submission to the Economic Development, Science and Innovation Committee is available here.
The Bill, proposed by MP Dr Duncan Webb, would amend section 131 of the Companies Act 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:
- recognising the interests of the wider community.
Our submission to the Select Committee
- Inadequate problem identification:
We question whether there is 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, including by taking a long-run view of the company’s interests. 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 that, 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 section 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.
Bell Gully will be staying closely engaged in this process, and will continue to update you with any new developments.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.