Directing business in heavy weather

It is human nature to see darkening clouds and carry right on with the picnic, hoping for the best – but the year ahead looks challenging for picnickers.  

Efforts to curb global warming continue to fall short and the prospects for harm on an immense scale, through accumulated damage to the environment or conflict, continue to build. In a so-called ‘post-pandemic era’, Sars-CoV-2 continues to mutate, and its long-term effects accumulate in our communities and workforce. Inflation is with us once more, at the checkout and the bottom-line. 

The default temperature of political debate and engagement appears now to sit perpetually at just below boiling point. The likelihood of opposing sides willingly looking to settle on a peaceable, enduring middle ground is fast receding. These are all mighty dark and stormy clouds.

Leadership is more vital now than ever, but harder to find. It is simply very difficult to predict exactly how the many wicked variables will play out, and it can be tempting to leave the risk-taking and problem-solving to others. New Zealand’s cranky, under-invested infrastructure networks are evidence of where that approach can lead.

The corporate sector, particularly directors, can play an important role, especially given the season of strong profits we are seeing. But is there an appetite to do so?

Any director’s first duty is to act in the best interests of the company. In an uncertain economic environment it shouldn’t surprise if directors interpret that duty narrowly in order to maximise the return to shareholders, although a prudent board will be factoring in a degree of caution in all forecasting and planning for further economic dislocation, workforce disruption and inflation. But should directors be looking more broadly than simply retaining and/or maximising shareholder value?

In September, Labour MP Duncan Webb’s private member’s bill to amend directors’ duties finally had its first reading in parliament. The Companies (Directors’ Duties) Amendment Bill is making slow progress, despite Labour’s majority. At the time of writing, the first reading had been stalled part way through and the bill is yet to be referred to a select committee, though that will happen.

The bill, just a few paragraphs long, amends section 131(1) of the Companies Act 1993 to spell out that when determining what’s in the best interests of the company a director may take into account ‘recognised environmental, social and governance factors’. It includes the principles of Te Tiriti, reducing adverse environmental impacts, upholding high standards of ethical behaviour, following fair and equitable employment practices and recognising the interests of the wider community.

Whether such an amendment is actually required is a moot point. The Companies Act does not currently require directors to ignore these factors, nor does it insist that maximising shareholder value is the only end worth pursuing. But, as the country faces more heavy weather, perhaps the corporate sector could benefit from a nudge, for everyone’s benefit.

The fact is New Zealand faces a series of macroeconomic and existential challenges. We are not alone in this but elsewhere (look at Australia, the UK, China and the US) the usual institutions that should be expected to lead an economy safely through jagged rocks are demonstrably failing. It is in no-one’s interests for that to be the outcome here.

A board that is prepared to look at wider questions, that is prepared to measure its performance against, for instance, broader environmental and social criteria is arguably contributing to the preservation and enhancement of an economy and society that serves all interests, including its own and its shareholders.

Take climate change: the climate crisis (increased extreme weather events, warming oceans, rising sea levels) is not a problem that wants for solutions, rather it is a problem of lack of will.

Even faced with the real costs and consequences of climate change, the political debate about how to acknowledge, address and mitigate it continues to be used as a vehicle to amplify tribal divides. Yet potential new markets and opportunities abound and good governance and corporate leadership can be, and often is, steps ahead of the politicians.

A whole range of New Zealand businesses recognise the value customers (here and in overseas markets) place on environmental sustainability and also the value of protecting our land and primary resources from further degradation. For them, reducing environmental impacts, including climate change, is well within what is in the best interests of the company.

These boards already know the role they can play. Similarly, boards that understand the transition to a zero-carbon economy have the potential to deliver great value – if great skill is exercised in this transition management.

It is, for example, an inconvenient truth that a post-carbon economy will (for the foreseeable future at least) still require steel. Steel-making requires traditional energy. So prohibiting access to, or the use of, traditional energy sources before industries can effectively replace them risks economic damage beyond the regions directly affected. These kind of trade-offs need to be fully disclosed, debated and managed.

In a fevered political environment, debates like these are likely to be unproductive and, ultimately, bitter. The arguments about the government’s proposed Three Waters reforms are a good case in point. Whatever the merits of the proposal, a good deal of the debate is about how debt to fund vital public infrastructure should be structured and funded. Directors well used to understanding balance sheet pressures could have provided a valuable perspective, or at least replaced some of the heat with light. The same applies to the ongoing row over co-governance – an issue likely to dominate parts of next year’s election campaign.

These are, without question, times for fresh and clear thinking. This summer as we sit on the beach and wonder if the clouds overhead will bring rain, remember directors have a role to play, to lead with or without the bill moving slowly through Parliament.