A new bill introduces a provision that clarifies what directors should consider when they make decisions. This is actually big news because it signals a move away from ‘shareholder primacy’ towards stakeholder capitalism where directors consider many perspectives when making decisions.
Section 131 of the Companies Act 1993 (the “Act”) explains that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interest of the company.
The section is silent on what a director should consider when determining what the best interests of the company are. Generally a key consideration of the past has been the generation of wealth for the company’s shareholders.
The Bill adds a new subsection (5) to section 131 that reads as follows:
(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.
The key here is that this amendment introduces additional environmental, social and governance factors that directors may consider when determining the best interests of the company. It is a statutory recognition that directors can (and should) look beyond the generation of wealth when making decisions for the company.
One question to consider – and possibly submit on – is whether the term “may” reduces the impact of this proposed change. What if it were “must” instead. Another argument some make (that we do not agree with) is that directors already do all this so no need to have a change. In our view this is a helpful change which clarifies the position for directors.
You can here more about the proposed changes and what they mean in this Seeds Podcast episode, where our Partner Steven Moe interviews Dr Duncan Webb on his bill.
We have helped many for purpose entities over the years and would be happy to discuss your situation with you. Please feel free to contact us at Parry Field Lawyers.