Sarah Taylor: A wolf in sheep’s clothing - disastrous ramifications of new Bill

A wolf in sheep’s clothing: potentially disastrous ramifications of Bill amending Directors Duties recognising Treaty, environment and equity factors

If you need any more proof that the Ardern Labour government is out of control, then look no further than MP Duncan Webb’s Private Members’ Bill[i] that seeks to inject its woke socialist agenda into corporate governance with possibly disastrous long term ramifications for shareholders, investors and the wider economy.

The Companies (Directors Duties) Amendment Bill meddles with the fundamental principle of company law that directors must act in good faith and in the best interests of the company[ii] (ie the owners) by “making clear that when a director determines what is in the best interests of the company that he or she may take into account recognised environmental, social and governance factors”[iii].

As may be expected, the “recognised factors” bolster the Left’s socialist manifesto:

a) recognising the principles of the Treaty of Waitangi (Te Tiriti of Waitangi)

b) reducing adverse environmental impacts:

d) following fair and equitable employment practices:

e) recognising the wider interests of the community

The Bill which nods to directors that they can or should implement their pet radical agendas could seriously impact the wider economy as it would affect not only ordinary business corporations but would apply to directors of Kiwisaver PIE funds and other large funds governed by the Financial Markets Conduct Act 2013[iv].

On a technical level, the question is: would explicit recognition of the Treaty, environment and equitable employment practices as factors which Directors may take into account when considering the “best interests of the company” alter the balance between the rights of owners and creditors to take a successful action against directors who have failed to act in the best interest of the company or fund? In the opinion of Michael Arthur of Chapman Tripp “the Bill adds nothing to the existing law of director duties and is a virtue signal to the stakeholder view of corporate governance[v]”.  This opinion is largely based on the fact that current case law already allows directors to consider factors beyond the financial interests of the shareholders where the directors believe that these are also in the best interests of the company”[vi] . In other words, reducing environmental harm (beyond the scope of current rules), treating employees fairly and considering the wider interests of the community is in most cases good business and many investors explicitly seek managers who employ ESG practices.

So is Dr Webb’s Bill a mere “virtue signal”? Laws must be placed in their social context and judges, reasonably, tend to assume that where Parliament has changed a rule it did so for a reason. The real problem is that recent NZ case law has confirmed that whether or not a director is acting in the best interests of the company is subjective[vii]’[viii]. In other words the courts will not hold directors to account for their actions where they have acted in good faith on honestly held beliefs[ix]. So while Mr Arthur’s opinion that the law is nothing but a virtue signal may on face value be correct, we have no shortage of potential candidates for company boards who could send businesses or funds under their control into a spin through implementing radical but honestly held beliefs around climate change, equity and diversity and the role of the Treaty.

A further consideration is that while section 137 of the Companies Act which requires Directors to “exercise the care, diligence, and skill that a reasonable director would in the same circumstances”, the amendment to Section 131 explicitly introducing the Treaty, and environment etc will almost certainly influence courts as to what is “reasonable” in the context of whether their actions are in the best interests of the company. The Bill is likely to both encourage and indemnify activist directors who have wrecked businesses or sunk investment funds especially where they personally have little skin in the game and suffer little or no financial loss.

We need to look no further than to our government Superfund managers. There has been little, if any, critical commentary concerning recent moves by the $55bn (and shrinking) fund which has divested itself of long-term exposure to fossil fuel reserves as part of a “sustainability” push. Given the sheer impracticality of zero carbon, Chief investment officer Stephen Gilmore’s confidence that fund’s performance will not be adversely affected [x]is on face value half-baked if not wilfully ignorant. But this half-baked approach, which will cost both future retirees and taxpayers dearly, is already being followed by large private sector PIE investment funds implementing climate, diversity, inclusion and equity agendas.

Importantly, such fund managers can weaponise large investor capital pools under management to hijack company boards with the intention of forcing conversion to the “green economy” such as halting oil or coal extraction, leaving minority shareholders with little or no redress. For example, woke PIE fund manager KiwiWealth is currently boasting of the “huge role active ownership has played in our “Responsible Investment” programme, and how we’ve used this to help influence real change in some of the world’s largest companies[xi]”. This approach might be considered acceptable, at least to Kiwiwealth investors, to the extent that they are made to understand and explicitly accept that ESG policies are likely be at the expense of lower expected savings and retirement returns.

Specific mention of the Treaty also introduces massive fishhooks for minority shareholders and creditors of the thousands of iwi controlled companies which might introduce maori co-governance, advisory boards, cultural affirmation hires and tikanga practices.

Non-iwi controlled companies, publically named and shamed for lack of adherence to the Treaty or diversity, are also likely submit to the woke onslaught. Potential candidates include publicly listed companies such as Port of Napier, 65% owned by co-governed Hawke’s Bay Regional Council and, oddly, 25% owned by the newly branded NZ Reserve Bank (Te Putea Matua). Port of Napier minority shareholders would be at the mercy of Regional Council and Reserve Bank appointees should they decide to introduce the Treaty into port management practices.

On a cringeworthy note, Kiwiwealth is acknowledging to investors that “we must do more to consider stewardship from a Te Ao Maori worldwide perspective”, whatever that means. But diversity and equity Ministerial appointees to the Reserve Bank Governance Board appear to have been at the expense of members with current academic monetary policy research expertise[xii], costing taxpayers dearly (at current estimates $9bn) in mark to market losses on bonds. The point is: competence matters and diversity and equity hires hurt the bottom line not only for shareholders and investors but the wider economy.  

The Companies (Directors Duties) Amendment Bill is a wolf in sheep’s clothing with possibly disastrous long term ramifications for shareholders, investors and the wider economy. National and ACT should put this Bill near the top of their list for repeal in 2023.

The Companies (Directors Duties) Amendment Bill is now open for submissions which close on Jan 17, 2023.

You can submit on the Bill by clicking on the link here: https://www.legislation.govt.nz/bill/member/2021/0075/latest/whole.html#LMS554177

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[i] The Companies (Directors Duties) Amendment Bill

[ii] Companies Act, s131

[iii] “Traditionally (companies) have been considered as a vehicle for enterprises who have commercial profit as a sole or primary objective. This need not be the case”…. “a director….. can take actions which take into account wider matters other than the financial bottom line”...when pursuing “recognised environmental, social and governance factors”.

[iv] Financial markets Conduct Act section 6(1) meaning of “company“ and “director“

[v] The Companies (Directors Duties) Amendment Bill, p5

[vi] Director Duties Bill – a road to nowhere: Michael Arthur, Chapman Trip, p5 https://chapmantripp.com/media/1zcap3hu/2022-nz-corporate-governance-trends-insights.pdf

[vii] Debut Homes v Cooper – Courts of New Zealand: SC 29 2019

[viii] Debut Homes v Cooper, [para 112]

[ix]  Debut Homes “The Courts do not second-guess the business decisions made by directors in what they honestly believed to be in the best interests of the company”

[x] https://www.interest.co.nz/public-policy/117608/fund-established-help-out-nz-future-pension-requirements-confident-its

[xi] KiwiWealth Quarterly Investment Update: July to September, 2022 p3

[xii] The NZ Initiative: Roger Partridge: Why RBNZ Governor Adrian Orr should be in Finance Minister Grant Robertson’s sights; NZ Herald 27 October, 2022.

Sarah Taylor is an accountant based in Napier.