Sunday, June 25, 2023

Roger Partridge: Labour's "fix" makes company law worse

When it comes to pointlessness, the Companies (Directors Duties) Amendment Bill takes some beating.

When drawn from the ballot, the Bill proposed amending section 131 of the Companies Act 1993 dealing with the duty of directors to act in the best interests of the company.

Labour MP Duncan Webb was the Bill’s mastermind. He wanted to make clear that, when considering the best interests of a company, directors can consider the Treaty of Waitangi and a mix of environmental and social and considerations – along with profit maximisation.

There’s just one problem. The Companies Act has never suggested directors are prohibited from taking a broad view of what is in a company’s long-term interests.

What then would the courts make of the new law? Would they presume Parliament was simply stupid in passing unnecessary legislation? Or would they read into the new law something that was never intended? Either way, no good could come.

Even officials struggled to say anything positive about Webb’s Bill. The Ministry for Business, Innovation and Employment’s advice to the Select Committee warned the proposed law “may have unintended consequences including creating confusion for directors…”

MBIE’s conclusion was blunt: The Bill should not proceed.

Sadly, the Select Committee has only attempted to temper the Bill’s confusing provisions.

The amended Bill now simply states “To avoid doubt, in considering the best interests of a company… a director may consider matters other than the maximisation of profit.”

Even this formulation is misguided. The problem centres on the difference between short-term and long-term profit maximisation.

Most directors know that if they focus narrowly on short-term profit maximisation, they may harm a company’s longer-term interests. That’s precisely why few directors will ignore broader factors in considering a company’s best interests.

But most shareholders want companies to maximise long-term profits. Indeed, that’s exactly what most of us are relying on with our KiwiSaver investments.

The Bill’s failure to spell out the difference between short- and long-term considerations will create the very confusion the Select Committee was hoping to avoid.

Worse still, Labour MP Camilla Belich, who is now responsible for the BIll, signalled at its second reading that Labour is drafting a Supplementary Order Paper to reinstate much of what was wrong with the Bill’s original incarnation.

Either way, if the Bill’s object was to make company law less workable it will achieve its aim. But if it was trying to do good, it is worse than useless.

Roger Partridge is chairman and a co-founder of The New Zealand Initiative and is a senior member of its research team. He led law firm Bell Gully as executive chairman from 2007 to 2014. This article was first published HERE.

1 comment:

Robert said...

An excellent observation Roger. I believe we are ill served by our Legislature. They seem to have lost the plot! So much of our modern legislation is very poor quality, often attempting to fix a problem which has yet to be defined, and more often than not created without much thought to cost versus benefits.
Personally I lay much of the blame at the foot of Sir Geoffrey Palmer who seemed to think the longer Parliament was in session, the better its output. The most absurd measure is to permit private members Bill's by lottery, which seems designed to give every ,member the chance to get his/her pet idea into the draw for consideration as becoming future law. Just an ego exercise!
Our law, which underpins the whole concept of the Rule of Law, should be established with great care and with the assistance of specialized and skilled law drafters. The substance of any law should be contained within an Act of Parliament, not delegated to changeable regulation, and certainly not further delegated to bureaucrats to create their own rules.
Our MP's spend too much time in Wellington and not enough in their electorates finding out what we, in the real world, need by way of law.
Our statutes are too rushed, too vague, full of ill defined flowery b.s., lack substance, and in many cases should never have been enacted.
The RMA, and the Local Government Act are classic examples of stupid legislation which have cost us $m to sort out what they actually mean, and which have spawned huge numbers of extremely expensive bureaucrats who find a thousand reasons to disrupt our lives to no good purpose. Palmer was a knowledgeable idiot and his successor Parker no better.
Keep up the good work Roger, NZ is drowning in poor legislation which often seems to have little effect on any determined law breaker.