The Companies (Directors’ Duties) Amendment Act (the Amendment Act) passed its third reading on 1 August 2023 and became part of New Zealand company law on 8 August 2023. The Amendment Act amends section 131 of the Companies Act 1993 (Act) (i.e. the duty of directors to act in good faith and in the best interests of the company) to clarify that directors may consider matters outside of the maximisation of profit (for example, environmental, social and governance matters) when determining whether a decision is in the best interests of the company.
Change in the directors’ duty of good faith?
Section 131 of the Act provides that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company. While there is no statutory checklist of matters for directors to follow in determining what is in the best interests of the company, the courts have accepted that boards, acting properly, are best-equipped to use their discretion to determine the considerations.
The bill was first introduced in September 2021, and was intended to make it clear that directors of companies may consider a wide number of factors while making decisions, including environmental, social and governance (ESG) matters. The bill followed similar legislation in the UK and Canada, and while through the bill stage the Select Committee didn’t agree that the Bill should be passed, it did recommend amendments to it all the same. After being amended following further recommendations from the Ministry of Business, Innovation and Employment, it was passed on 1 August 2023 (under urgency) and became law on 8 August 2023.
Section 131 now includes a new paragraph that states that directors may “consider matters other than the maximisation of profit (for example environmental, social and governance matters)” when determining whether an action is in the best interests of a company or a holding company.
Interestingly, and perhaps inadvertently, the Act by now including direction that directors may consider matters, other than the maximisation of profit; effectively codifies that the maximisation of profit is in the best interests of a company, for the first time in New Zealand company law. It is also the only reference to profit in the Act (outside of determining if a company is related to another company, shares carrying a right to distributions, or a liquidator’s right to disclaim unprofitable contracts - which, itself, is a concept that is subject to much debate).
While the amendment is interesting in its broad reference to ESG factors being discretionary considerations (unlike the UK, which has mandatory ESG considerations), some notable changes were made to the original private members’ bill to that ultimately passed. Specifically, the original private members’ bill listed five non-exhaustive ESG factors that directors could consider while making decisions, such as:
(a) recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi);
(b) reducing adverse environmental impacts;
(c) upholding high standards of ethical behaviour;
(d) following fair and equitable employment practices; and
(e) recognising the interests of the wider community.
While the omission of the “recognised” wording, and the list above, is perhaps a reflection that these factors are commonly understood to be ESG considerations, the deletion of the non-exhaustive factors is unhelpful for those directors seeking to specifically raise these at a board level and using the text of the legislation as an enabler of that discussion.
What does this mean for corporate governance in New Zealand?
The passing of this Amendment Act will not make it mandatory for directors to consider ESG factors in exercising their duty to act in good faith, and while its primary effect was intended to be one of clarification, it doesn’t achieve this. Moreover, this amendment introduces concepts into New Zealand corporate governance law that are likely to pose challenges for boards, corporate governance advisors and the courts - including whether the maximisation of profit is now an assumed, mandatory or discretionary consideration for directors.
The above being noted, with the rise of public appetite to support sustainable businesses and the increase of climate-related regulations, directors should already view that considering ESG factors is consistent with acting in the “best interests of the company”. It forms part of business’ social licence to operate, and in that respect, the Amendment Act doesn’t achieve anything new.
What is clear though, despite the legislation, is that (1) ESG factors are, and will continue to be, a significant consideration for directors, and (2) the expectations and complexity of directors' duties continues to grow.
If you would like to talk through what the changes mean for your business, please get in touch with your team at PwC and PwC Legal
