Stakeholder governance - Next steps

In July 2021, the Institute of Directors partnered with MinterEllisonRuddWatts and released their Stakeholder governance - A call to review directors' duties whitepaper which outlines the evolving corporate governance landscape in relation to stakeholders. The paper includes significant New Zealand and global developments and trends, covers relevant law in New Zealand, and calls for a review of the framework for directors’ duties in the Companies Act 1993.

As part of developing governance best practice it is important to consider whether current governance frameworks remain fit for purpose and capable of achieving the outcomes society values. Given recent social, environmental and economic shifts at a global level, we consider it timely to explore directors’ duties and to consider whether current legislative settings need clarification or amendment.

One of the issues examined in the paper was what it means for directors to act in the best interests of the company, and whether the primary responsibility of the board is to look after the interests of shareholders and maximise shareholders’ profits, or can/should directors consider the interests of all stakeholders (such as employees, customers, suppliers, communities or the environment)?

Feedback received

We received a range of feedback on the paper from those wanting reform to those seeing no need to change the current law, but for different reasons. There’s also been some wider debate amongst other stakeholders which we’ve monitored. Key feedback themes are summarised below.

Support for a review or more clarity

• Some submitters supported a review to make it clear that directors already have an existing duty to consider the interests of broader stakeholders as part of acting in the best interests of the company and/or allow for alignment of the corporate model with new ways of thinking around broader societal interests.
• One idea was to require companies to have a constitution under the Companies Act that states their purpose and mission, and potentially includes a stakeholder clause thereby providing clearer guidance for directors and the rules they have to follow.

No review required but for different reasons

• Some submitters felt that the law is already sufficiently clear and a review is unwarranted at this time because it is firmly established at law that acting in the best interests of the company means responding to all influences that help the board to determine those best interests. Such consideration is not confined to shareholder interests and that governance of a company could encompass wider values, including Māori values. There is some concern that any move to introduce additional “prescriptive legalities” could be distracting and counter-productive.
• Feedback against law change maintained that the current law is clear and does not oblige directors to take into account a variety of stakeholders’ interests, thereby supporting the concept of shareholder primacy. To do otherwise would undermine the legal understanding of the relationship of agency between the shareholders and the board and the flow-on fiduciary duty. If the fiduciary duty was expanded to include other stakeholder interests, there is concern that this could lead to undesirable uncertainty including uncertainties about the validity of contracts and liability of third parties. Adding a layer of societal obligations into directors’ duties would make the duties more uncertain and could potentially impact on the competitiveness of the corporate form of business, making New Zealand companies less competitive.

Other comments

We received some other comments and suggestions.

• One view raised the risk around ignoring the expectation of stakeholders. Corporations who ignore their stakeholders’ social and environmental expectations could be at risk of reduced profitability.
• Another view thought that companies should be held to a high level of ethical standards, whether this be a legislative requirement or included in a code of practice for directors. As a minimum this could include an obligation on directors and companies to take all practicable steps to eliminate or minimise harm, but could include other ethical standards.

There is a need for clarity

The range of views received in response to our whitepaper suggest directors‘ duties in relation to stakeholders are not so clear. The world directors govern in has, and continues to, change and directors need to know what is expected from them – particularly given the heightened risk of increasing numbers of class actions.

The Companies (Directors Duties) Amendment Bill and next steps

Since releasing our paper, Professor Duncan Webb (Labour MP for Christchurch Central) has had his member’s bill introduced into the House. The Bill seeks to clarify current practice and direction around directors’ duties by making it clear that a director, in acting as the mind and will of the company, can take actions which take into account wider considerations other than the financial bottom-line. The Bill recognises that the matters to be taken into account in determining the best interests of a company are open-ended but may include matters such as the principles of te Tiriti, environmental impacts, good corporate ethics, being a good employer, and the interests of the wider community.

Recently, the Canterbury branch hosted Professor Webb to discuss the Bill. IoD members can watch the on-demand webcast.

MBIE is also doing some work on a Long-term Insights Briefing that focuses on the future of business for Aotearoa New Zealand.  See their discussion document.

We will provide further opportunities for members to engage and discuss the change proposed in the Bill and broader stakeholder governance issues.

In the meantime, we welcome further comments to glc@iod.org.nz