Proposed Changes To The Companies Act Mark The Beginning Of Positive Change
“For decades our rules have lacked clarity over the function of directors, their duties and what they should consider when making decisions. Our thinking has been influenced by the economist Milton Friedman who in 1970 declared that the primary function of a company is to generate wealth for its shareholders.” Lawyer and podcaster Steven Moe examines a new role for private companies in our communities.
Photo: Zac Ong/Unsplash
Important change often goes unannounced and only with hindsight do we see the significance.
Last week a Member’s Bill was selected which has nothing to do with the headline-grabbing news on the status of vaccinations, house prices or the economy. Instead, it addresses a core belief that is commonly held about the role of directors of companies in New Zealand.
For decades our rules have lacked clarity over the function of directors, their duties and what they should consider when making decisions. Our thinking has been influenced by the economist Milton Friedman who in 1970 declared that the primary function of a company is to generate wealth for its shareholders.
The reasoning behind that theory has been showing more and more cracks recently. Considerations like climate change, fair practises for employees and the impact a company has on its community all give cause for reflection.
Could it remain right that the duties in the Companies Act remain silent on what directors consider when making decisions? With Labour caucus support the selection of Duncan Webb’s Member’s Bill in the ballot means change is on the way.
Webb explains, “The spark for this little bill was an urgent debate in Parliament on the letter of expectations that the Minister sends to Air NZ every year. It set out some climate expectations, good employer expectations etc. David Seymour thought this an outrage to divert Air NZ from a maximising profit motive. I thought it nonsensical that there was a debate at all – but thought if there is some suggestion that ‘the best interests of the company’ means ‘making as much profit as we can ...’, then we need to clear that up.”
The key amendment is to section 131 of the Companies Act and the introduction of additional “recognised environmental, social and governance factors”, which directors may bear in mind (we will come back to the use of the word “may”).
There are five factors listed: the principles of the Treaty of Waitangi; the environment; ethical behaviour, equitable employment practices and the interests of the wider community.
Before critics weigh in on how this is going too far, it is important to note that this is in line with developments overseas. For example, in the UK since 2006 the duty of directors to promote the success of the company has included a list of similar considerations which directors may have regard to such as the employees, customers, suppliers, the community and the environment.
There are recent proposals in the UK to make these duties more rigorous with a proposed “Better Business Act” that aims to put the balance of ‘”people, profit and planet” at the core for responsibilities of directors. The proposed amendments state that it must no longer be an option for directors to benefit wider stakeholders – instead it is proposed to be a requirement to consider them.
There may be tweaks to the New Zealand proposal which could incorporate some of these ideas and jump over a generation of thinking to where the debate eventually leads.
We could have that discussion here and now, including a robust discussion over moving from “may” consider, to “must” consider.
Considerable thought on these issues is ready to inform that discussion, such as recent reports by the Aotearoa Circle’s Sustainable Finance Forum roadmap, the IOD paper on stakeholder governance and the Ākina Foundation structuring for impact report.
Even if no changes are made to the bill, this reform is the start of a positive reframing with increased scrutiny for companies and shows a roadmap for additional changes that may flow in the future.
For example, a natural extension of what is proposed here would be to require that all companies must have a constitution in which they clearly articulate their mission and purpose. Hand in hand with that could be a requirement that companies report on how they are going about achieving that purpose, to avoid social washing. In other words, the bottom line might no longer be enough.
Photo: Zac Ong/Unsplash
An additional change that goes even further could be that those companies who are clearly advancing both profit goals and purpose goals could even be given special status and incentives as “impact companies” in recognition of their blending of traditional conceptions.
We have been fish in the bowl, not aware of the paradigms of thinking which we assume represent how things will always be. But our current system did not exist 100 years ago – it can be changed.
Generations to come might just look back at New Zealand as the place where moves were made first. That is why the proposed changes to these director duties are exciting.
They are the start of real change that will enable us to better conceive the place of companies in our society and positively frame the role and duties of directors. This will provide an ecosystem for the growth of the future that we want to see, where companies increasingly contribute positive impact.
Published as an Opinion piece in Stuff on 29 September 2021.