Stakeholder focus highlights need to review directors’ duties

As the world reels from a pandemic, climate change and growing social inequality, companies are increasingly asking themselves questions about their overarching purpose and who they serve. Spoiler alert: it’s not just shareholders, according to a whitepaper released today by the Institute of Directors (IoD) and MinterEllisonRuddWatts.

The whitepaper offers good reasons to suggest that the laws governing directors’ duties are ripe for review.

IoD general manager, governance leadership centre and membership Felicity Caird says stakeholder governance is one of the top issues in global governance.

“Simply put, this is about companies considering the interests of all relevant stakeholders in decision-making. Of course, this means shareholders, but it also includes regulators, customers, suppliers, employees, the environment, and society as a whole.

“The focus on stakeholders is nothing new. However, social expectations, the rise of ESG and unprecedented global issues are driving it up the agenda,” says Ms Caird.

“There are a number of initiatives around the world aimed at helping boards navigate this landscape. For instance, in the UK there is a push for legal reform to advance the interests of wider society and the environment alongside those of shareholders.

“We’re seeing signs of change in New Zealand, too, as regulators, investors and the community make their expectations clearer. The Sustainable Finance Forum is at the forefront of work to fundamentally overhaul the financial system to meet sustainability challenges and opportunities, now and in the future,” says Ms Caird.

MinterEllisonRuddWatts partner and head of corporate, Silvana Schenone co-authored the paper and asserts that under the Companies Act 1993, directors are not prevented from considering stakeholders in governing companies.

“However, there are still unresolved questions as to a board’s responsibility around maximising shareholders’ returns, creating long-term value, and the extent that various stakeholders’ interests should be considered or prioritised,” says Ms Schenone.

“The business landscape is radically different from 30 years ago when the Companies Act was introduced. Directors have far greater responsibilities, and much more is expected of them in terms of leadership, stewardship and accountability.

“Directors play a critical leadership role in contributing to the wealth and wellbeing of New Zealand. They need to be enabled to succeed, and this means ensuring that there is sufficient clarity and certainty around their core duties and the extent of their responsibilities. Clarifying whether the law expects directors to prioritise shareholders’ profitability over other stakeholders’ interests as part of their acting “in the best interests of the company”, is key” says Ms Schenone.

There is a range of issues relating to directors’ duties in the Companies Act that need attention to ensure they are fit for purpose.

Both the IoD and MinterEllisonRuddWatts agree now is the time to review directors’ duties in New Zealand to ensure directors are in the best position to lead our companies for a strong, fair and sustainable future.

ENDS.