On 8 May, a Parliamentary select committee delivered its report on the Companies (Directors Duties) Amendment Bill (the bill), which proposes to amend section 131 of the Companies Act 1993 to state directors may take into account recognised environmental, social and governance (ESG) factors when determining the best interests of the company.
The Economic Development, Science and Innovation Committee (the committee) was unable to agree that the bill should pass but said, if it was to proceed, it ought to be amended. This follows advice from the Ministry of Business, Innovation and Employment (MBIE) recommending to the committee that the bill should not proceed.
The committee’s suggested subsection 131(5) removes the list of ESG factors and instead simply proposes that, “to avoid doubt”, when considering the best interests of a company or holding company “a director may consider matters other than the maximisation of profit”.
In our view:
- The bill continues to be well-meaning but misguided. It has not identified a clear problem to solve.
- The amended formulation of the bill goes some way to addressing some of the concerns we raised about the original bill. However, the committee’s suggested alternative drafting continues to raise a risk of unintended consequences.
- The bill should not proceed.
Bell Gully’s submission on the original bill
Bell Gully previously provided an update on the bill and made a submission to the select committee. In summary, the bill, as originally introduced, would have amended section 131 of the Companies Act (the duty to act in what the director believes to be the best interests of the company) by inserting the following new subsection:
(5) To avoid doubt, a director of a company may, when determining the best interests of the company, take into account recognised environmental, social and governance factors, such as:
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- recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi):
- reducing adverse environmental impacts:
- upholding high standards of ethical behaviour:
- following fair and equitable employment practices:
- recognising the interests of the wider community.
Bell Gully submitted that there was no identified problem to be solved by the proposed amendments, as directors can (and do already) consider ESG matters when acting in what they believe to be the best interests of the company. Although the bill is well-meaning, we identified a number of potential unintended consequences. We also suggested that a number of changes be made to the bill if it were to proceed.
The committee’s report
In its report, the committee agreed with a number of points raised by submitters and advice from MBIE and the Clerk of the Committee. These included that the bill as introduced “could have unintended consequences”, such as giving the impression that the specific ESG factors listed “should be given more weight than others”. The committee also noted that non-legislative alternatives, such as education and training for directors, could fulfil the bill’s objectives. These points align with those made in Bell Gully’s submission.
Ultimately, the committee, which is constituted by an equal number of government and opposition members, was unable to agree that the bill should proceed.
The committee agreed that, if the bill were to proceed further in Parliament, the proposed subsection should be deleted entirely and replaced with the following new subsection 131(5):
(5) To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit.
The committee’s proposed amendments appear to be an attempted compromise that, in our view, achieves little and would give rise to the same types of risks as the original bill. We believe that the better approach would be not to proceed with the bill.
Bell Gully will be staying closely engaged in this process, and will continue to update you with any new developments.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.