Companies (Directors Duties) Amendment Bill

Kia ora e te Mana Whakawā—a pleasure to take this call. I move, That the Companies (Directors Duties) Amendment Bill be now read a first time. I nominate the Economic Development, Science and Innovation Committee to consider this bill.

💬 Glen Bennett: Good committee.

Excellent committee, well led, and I do hope that it will get the opportunity to take this bill and really improve on what is, I think, a small but very good and important idea. All this bill really does is make it abundantly clear that companies are able to act as responsible corporate citizens. In effect, this bill will confirm, in law, what many companies have been doing for a long time: taking into account the wider impact that they have on society, the community, and the environment.

A company is a separate entity, it’s got its own legal rights, duties, and obligations. Importantly, those obligations are ring-fenced; directors and shareholders are not responsible for the liabilities of a limited liability company, except in extraordinary circumstances. But I think we’ve always got to remember that a company is a legal construct—it doesn’t have a mind or will of its own; it’s simply a creation of the law—and a director is an agent, and by duty of a company that he or she directs. They have a duty to “act in good faith and in what the director believes to be the best interests of the company.”—that’s what section 131 of the Companies Act says. And it’s always the law in relation to companies and, indeed, fiduciaries generally.

But somewhere along the way, the interests of the company have been conflated with making profits alone. It’s clear that a company must be solvent and mustn’t act recklessly, risking the creditors’ funds. However, it’s never been the law that there is a legal obligation on a director to seek to maximise profits at the expense of all else. While the law places minimum constraints on the behaviour of companies in respect of the activities of that company, I think we can expect more, and, by in large, companies deliver more.

So, first, this 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 into account a wide range of considerations in determining the best interests of the company. This shouldn’t be surprising; anyone who’s read Larry Fink’s 2021 letter to CEOs, in which he warned that companies who ignore stakeholders do so at their peril, would understand that even a company that seeks to maximise profits has to take into account the wider context in which it does business, and it’s only going to be sustainable in the long term if it does so. But, secondly, the bill recognises the really important place of companies which have, as a key objective, a goal other than profit, those entities which have, as their mission, some social impact, environmental, or other outcome. It’s long been the case that these entities, whatever you label them, have existed. However, often an incorporated company hasn’t been seen as an effective and useful vehicle. They’ve leaned towards other entities, like trusts, incorporated societies, friendly societies, industrial and providence societies, credit unions, and the list goes on.

But the need for a more flexible approach is clear, and that’s something that the Ākina Foundation, in its report Structuring for Impact: Evolving Legal Structures for Business in New Zealand, really points out. The fact is that the limited liability company is really flexible. It can be a useful vehicle for such projects: it can bring capital and shareholders together; it can bring together the disparate views of shareholders, in the form of a board of directors; and it can act as a legal person in entering into legal arrangements. So it’s no wonder that many social enterprises, impact companies, and B Corporations used a limited liability company as a vehicle. This bill will make that easier and better. I’m not sure it’s going to be quite the great leap forward that has been suggested by Andrew Davies of B Lab, but I do hope that it marks the beginning of a positive change, which was suggested by Steven Moe, another real champion of impact companies and investment in New Zealand.

The bill itself is short, even tiny. The operative clause is only a few hundred words at most, and it only adds one subsection to section 131 of the Companies Act. That section simply makes it clear that what we can take into account when determining what’s in the best interests of the company is much wider than perhaps has previously been put forward.

It’s interesting that the interest of a company has been departed from in the UK quite significantly. In their Act, they say that the directors must act to promote the interests and success of the company, but they take a much more modern formulation of that, which has much wider measures.

I do want to point out that this bill is my own formulation of what the law should look like, but I’m absolutely not wedded to it, and I really think the select committee has good work to do in examining carefully the proposed formulation and improving, adding, and perhaps even subtracting from it. So I really look forward to that and—as Jacqui Dean said previously in respect of her bill—I look forward to working with the committee on that.

I do invite the committee to consider all of those clauses. For example, the bill states in new section 131(5)(a) in clause 4 that the company may recognise the principles of Te Tiriti. I’m sure that the sentiment is clear that companies are able to put Māori interests, principles, and values to the fore; whether that’s the best formulation is another question. It may be that the net needs to be cast wider to take into account different and wider conceptions of Te Ao Māori interests, principles, and values to the fore; whether that’s the best formulation is another question. It may be that the net needs to be cast wider to take into account different and wider conceptions of Te Ao Māori. So I look forward to any expansion on that.

New section 131(5)(b) proposes that directors may take into account “reducing adverse environmental impacts”. Again, the objective, I think, is clear, but I’m not a scholar in that area. I’m sure that those words can be improved to better capture the ability of a company to take into account the impact it may have on sustainability and the environment more generally.

New section 131(5)(c) states that the company may seek to uphold high ethical standards. That could come in a number of forms, whether it’s sourcing goods that are certified as fair trade, or not sourced from areas occupied by belligerent forces—which we see in Ukraine and, of course, the West Bank—and also reassuring that its own products are marketed honestly and fairly. That’s not saying meeting the bare minimum legal standards but doing more and better, which may not reach the same profit standards, but it will be a more sustainable—in every sense of that word—business model, which puts perhaps at a higher rating, at a higher—

💬 Angie Warren-Clark: Value.

—value—thank you—the interests of the community, customers, and stakeholders, rather than merely shareholders and profit-takers. So I really do hope that there are improvements to be made there.

In some ways, that’s simply an extension of following and, of course, protecting and promoting the interests of employees as relevant stakeholders. It’s a real labour value, and one that says that we should look to not just shareholders as part of the stakeholder kind of constellation but also employees as an important part of the health and wealth of any company.

So I think it’s really important that we look carefully at that and look at how it can be best expressed. But, really, what this is saying to the corporate world: “Let’s rethink what companies are. Let’s ask ourselves whether it might not be better to say: what is the purpose of a company?” Now, shareholders can, through a board of directors, say, “The purpose of this company is to give me money—to give me a return on investment.”, but I don’t think every shareholder is that venal. I think many shareholders want a much more balanced approach, and I want for shareholders to be able to speak to their directors, through the company vehicle, to say, “We put other values higher than mere profit and we want to see our capital used to improve the wellbeing of New Zealanders and the international community in a much different and better way.”

I think that this bill helps companies achieve that. It’s an enabling bill. It’s not a mandatory bill. I think it’s a real improvement and step forward, and I do hope that other parties around the House will support it, because what it does is it gives more rights and more freedoms to shareholders and directors to improve the welfare of a company’s shareholders and New Zealanders. Kia ora.

Where to start? Because what this member who’s brought the bill to the House really has said is that, actually, he’s not sure what companies are for and that he has written this bill himself but he’s not sure of quite what he said in each of the clauses and that the select committee should go away and try and fix this for him because he’s not a lawyer. He’s then gone on to say that, actually, although it’s not written in law and that it’s not necessarily the case because it’s not required by statute that all companies in New Zealand maximise profits above all else. What absolute rubbish. He quoted something that somebody said there supposedly in support.

Actually, if we look at what’s happened since the bill was drawn from the ballot, those of legal mind who work in this area every single day who go out on behalf of shareholders to prosecute companies’ directors that are not doing their jobs properly, but who advise companies large and small in New Zealand, including the Government, have said—at best, Roger Partridge, the chairman of the New Zealand Initiative, said, “The directors duties bill is well meaning but harmful.” I think he’s wrong; I think it’s well-meaning but, actually, will make no difference at all with the exception that what we know is when this Parliament passes a law, even when the law says you may do something—in this case, everything the member said they may do actually is already possible, and Companies New Zealand already consider these things. Many of them consider all of the things that he said that he wants them in law to say they may. But, actually, what happens—the courts and advisers to companies and lawyers and others say, “Parliament’s passed a law that says you may, but that means you actually must take it into account and consider it whilst you go about your duties.”

Now, he would say that’s a good thing, the member who’s brought the bill before the committee, but the problem with good intentions is actually the consequence thereafter when it enters into law. All we need to do is look at the Government backtracking quickly a short time ago around the Credit Contracts and Consumer Finance Bill (CCCFA), which was well intended; it was actually well-meaning. We were told by the Minister in the House that it was really only to clarify, and nothing would change, but, actually, what has happened is banks have decided they have to take completely what Parliament has suggested to an extreme, and people can’t get their mortgages, who previously would have been able to. And there’s extra greater cost there—so much so that the Minister has said that we’re going to have to fix that, less than year after it’s come into effect.

So the problem that we have when a member stands up in this House and says, “I’ve written this bill myself; I’m not a lawyer. These are the things I intend it to do. However, I’m not sure it will do that because there’s lots of ways to read it. Please, select committee, can you make sure you can fix this for me, as the unintended consequence will be actually greater challenge and cost and altering of what businesses do.”

Now, here’s an example of how it could go so very, very wrong, because in saying “may”, there will be companies around the country where directors say, “Well, Parliament says we may do this, so we should consider it.” And they may take action which means they’re not able to pay their debtors, they’re not able to pay their bills, and they’ve had to weigh that up and say, “Well, we think we want to consider the Treaty and environmental impacts and other things.” And they make decisions that mean they’re not able to pay their bills. No, it’s not about insolvency as the member has said; it’s, actually, directors of a company have a duty to make sure, yes, they’re solvent; and, two, they can pay their bills.

Actually, what this is doing where they’re already able to consider these things but they have an obligation—not about profit but about running a company properly, paying their tax, paying their bills, making sure that their debtors are not put at a disadvantage and that they will receive payment for their services, they now will have other things they need to consider. And there will be cases—just as we saw with the CCCFA which had a different consequence than we were told as a Parliament—where people don’t pay their bills to directors and they will have a defence.

Chapman Tripp, who I have a lot of respect for—I don’t have a lot of respect for all lawyers or law firms, but, in this case, this is a very, very serious company—has gone through this bill in detail, talked about the bits that could be helpful, the bits that are not harmful, but the bits actually that not necessarily could cause harm, and have come to the conclusion and said it’s virtue signalling: “In our view, the bill adds nothing to existing law of directors’ duties, and is a virtue signal to the stakeholder theory of corporate governance.”

Well, if that’s the case, why didn’t this member actually take the time to talk more widely, seek advice, talk to those that are experts in this area who know about drafting, and come up with something that would actually have the intention of what he wants, which is better corporate governance? This won’t do it. This House passing a piece of legislation, merely saying you may do some things that you’re already able to under law but we’re going to confuse this by writing it in law, rather than a company director being able to consider things that are important for that company, actually is not a good use of the House’s time, and it’s not a good use of the member’s bill process, because there are so very many important issues that this House actually could do something about. Sadly, this is not one of them.

You know, directors have to uphold ethical standards already. They must do. They must meet the requirements of New Zealand law when it comes to the environment. They must do that—they must do that. If the law says there’s an environmental standard, they must meet it. If they don’t, they are breaking the law. We heard an example from the member who’s moved the bill who said earlier—

💬 Dr Duncan Webb: Do better. Aim higher.

He’s very angry now because he realises he should have done a bit more work. But we’ve heard from the member earlier that there are companies that go out there who wilfully promote their products, knowing that they won’t do what they’ve said. That’s already against the law. This is not a good piece of legislation. It’s not a good use of the House time. In essence, at best, it is virtue signalling, but it will end up being harmful, and the National Party will be voting against it.

The debate is interrupted and set down for resumption next sitting day. The House is suspended and I’ll resume the Chair at 9 a.m. tomorrow for the extended sitting to consider Government orders of the day. Thank you everyone for your day’s work.

Debate interrupted.

Sitting suspended from 9.58 p.m. to 9 a.m. (Thursday)