Governing for the long-term

In a recent article the Australian Institute of Company Directors (AICD) considers the debate over where directors’ decision-making discretion lies when complying with the duty to act in good faith and the best interests of the company.

The AICD concludes that “acting in the best interests of the company means directors should focus on sustainable value creation over time, rather than short-term profit maximisation. While the interests of shareholders are central, directors can, and should, as a matter of practice, consider other stakeholders such as employees, customers and the environment when discharging their duty. Maintaining and advancing the organisation’s reputation and community standing are key considerations”.

The AICD practice statement from July 2022 highlights:

Directors have a duty to act in good faith and the best interests of the corporation.
Directors have considerable discretion to identify the best interests of the company, taking into account relevant facts and circumstances.
While shareholders/members’ interests are central, directors can, and should, also consider a range of stakeholder interests - doing so is often necessary to protect an organisation’s reputation and ensure its sustainability.
As a guiding principle, directors should take a long-term view of where the company’s interests lie.

This is consistent with a recent IoD submission to the Ministry of Business, Innovation & Employment (MBIE) on its discussion document: The future of business for Aotearoa New Zealand.

The IoD submission commented that “organisations should reflect on why they exist and be clear with their shareholders and wider stakeholders on what types of value they intend creating. Best practice governance encourages organisations to embrace a long-term view and develop strategy that results in sustainable business. All businesses have a purpose reflected in the “best interests” of organisation.”

The IoD submission builds on earlier IoD thinking about stakeholder engagement and director duties in New Zealand law which requires directors to consider the interests of the following stakeholders:

the paramount duty of directors is to act in the best interests of their company
it is commonly accepted that directors must consider the interests of creditors in their decision-making once the company becomes insolvent or is near insolvency
directors are permitted to make provision for the benefit of employees and former employees of the company in connection with ceasing to carry on the whole or part of its business, and this permission is noted as a qualification of the directors’ duty to act in the best interests of the company
directors must consider shareholders in a takeover scenario (they have an obligation to make a recommendation to shareholders as to whether they accept or reject a takeover offer)

We also noted there are many other laws in New Zealand requiring directors to consider and provide for the interests of other stakeholders, including the Health and Safety at Work Act 2015, the Resource Management Act 1991 and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, which often do not directly align with shareholders’ financial interests.

The private members Companies (Directors Duties) Amendment Bill 2021, proposes that boards will be enabled to think more broadly about a company’s purpose and the strategies they want to put it place to support it, says the bill’s sponsor Dr Duncan Webb.

The bill will enable companies to understand that the interests of a company – even a company which is seeking primarily to provide a return on investment to shareholders – can take a wide range of considerations into account. The Explanatory Note to the Bill includes the statement “This Bill makes clear that a director, in acting as the mind and will of the company, can take actions which take into account wider matters other than the financial bottom-line. This accords with modern corporate governance theory that recognises that corporations are connected with communities, wider society, and the environment and need to measure their performance not only in financial terms, but also against wider measures including social, and environmental matters.”

In a recent Boardroom magazine article, Dr Webb suggests “this [bill] recognises existing practice in this area – it not only approves of past practice, but it also sends a clear signal to the corporate community that a good board will turn its mind to the question of what its purpose is. In doing so the board will take into account a wide range of interests.”

A consistent theme emerges from analysis in both Australia and New Zealand: directors have a duty to consider the best interests of the company or organisation they serve. That duty relates to the long-term sustainability of the company or organisation. In turn, this longer-term perspective means that environmental, social and economic factors play a greater role in governance, than a singular focus on short-term returns.