Governance in our time

At our recent annual Leadership Conference there was a topical discussion that raised the possibility that directors’ duties could be defined in a way specific to Aotearoa New Zealand, and that this approach could prove world-leading in terms of the shareholder-stakeholder debate. Note I’m not saying shareholder vs stakeholder – because I firmly believe they should no longer be seen as mutually exclusive.

What might a New Zealand-centric concept of directors’ duties look like, and would it be substantially different to how it they play out in other parts of the world?

It’s a timely consideration as the world reconfigures amid ongoing impacts of the pandemic and the anticipated impacts of climate change. And it’s something directors need to engage with, because if they don’t they may just find something imposed on them via legislation without adequate reference to the realities of good governance.

Here in New Zealand, an amendment to the Companies Act 1993 is working its way through parliament. This amendment would acknowledge that environmental, social and governance (ESG) issues can be considered by directors when they act “in the best interests” of a company. Directors can already do that, of course, but the amendment would make that clear.

In 2021, IoD’s whitepaper on stakeholder governance argued it was time to reconsider the definition of directors’ duties in the Companies Act. While the Act requires directors to act “in the best interests” of the company, it offers little guidance as to what that means in practice.

Changing orthodoxy

In very recent history, dominant economic thinking underpinned a narrow interpretation of directors’ duties. It was widely accepted in the 1980s and 1990s that acting in the best interests of the company was the same thing as maximising shareholder profits. Other considerations were not fashionable.

Today, the economic ideology underpinning director duties has shifted to broaden what acting “in the best interests” of a company might look like. There is a recognition that the best interests of a company may include the interests of stakeholders who are not shareholders. These can include employees, customers or the communities in which a business operates.

Issues such as public perception and licence to operate, environmental degradation and climate change, growing wealth disparity and the prospect of social unrest, have begun to take a place alongside shareholder interests in board discussions.

In two ways, this actually aligns with the narrow interpretation of director duties that was dominant just a few decades ago. First, there is direct demand from shareholders for stakeholder interests to be considered at board level, and this is clearly visible in the rise of sustainable and ethical investment funds globally. Second, and undoubtedly related to the previous trend, creating a sustainable business model that can survive rapidly changing demands from regulators and societies will protect shareholder wealth. Not doing so puts shareholder wealth at risk.

A broad view

Issues such as climate change require business and the public sector to work together to find solutions, or our businesses and societies may not survive in the form we currently know them to, or wish them, to exist.

Boards are beginning to understand this. During the initial response to the covid-19 pandemic we saw many New Zealand companies take a wage subsidy from the Government, money to which they were entitled. Some of those companies found they were not impacted as badly as anticipated by the pandemic and chose to return some or all of the public money they had received.  This was a clear example of acting in the interests of a broader set of stakeholders than just shareholders.

The panel discussion at the Institute of Directors Leadership Conference drew out a range of opinions on this topic.

On one hand, it was rightly pointed out that the current wording of the Companies Act does not prohibit directors from taking into consideration the interests of a broad range of stakeholders when acting “in the best interests” of a company. From this perspective, changing the wording of the Act is unnecessary. From this perspective, a change would also prove to be no handbrake on directors’ decision making. As was acknowledged on the panel, it does not impose new requirements on directors.

At heart, the question is one of interpretation and philosophy. It challenges directors to do what they think is right for the company, not simply default to simple position of maximising shareholder wealth.

At the other end of the spectrum, the changes to the wording of the Companies Act are seen as recognition of what many directors are doing already. Essentially, it means updating the way the law is expressed to reflect current practice and the expectations of many directors, governments, communities – and shareholders.

Governance in our time

It was clear from the panel that good governance today may include creating a sustainable business model, improving relationships with communities and incorporating ESG concerns into business strategy – ideas not explicitly supported by the shareholder pre-eminence philosophy.

But the most interesting takeaway for me was the opportunity here:  to create a conception of directors’ duties that reflects the unique nature of Aotearoa/New Zealand. We can bring together competing ideas from the Western business philosophies of the past and present, with ideas from te ao Māori and to create something that reflects the shared recognition of the importance of good governance.

Some on the Leadership Conference panel felt the opportunity was even greater than that. There was a view that New Zealand could be a leader in governance. We could show other countries it was possible to develop a conception of directors’ duties that aligned with the social, political and economic expectations unique to that country and reflective of global governance trends.

Directors need to be leading this discussion to ensure the duties expected of them reflect what they can actually achieve, and to ensure their organisations can continue to thrive through changing times.

The opportunity to define governance for our time is real. Now is the time to seize that opportunity.