Companies (Directors’ Duties) Amendment Bill has become law

This month, Parliament passed the Companies (Directors’ Duties) Amendment Bill (the Bill) to revise the Companies Act, intended to give more weight to environmental, social and governance (ESG) factors in the context of directors’ duties.

The Bill amends the duty in section 131 of the Companies Act 1993. That section places a duty on company directors to act in good faith and in the best interests of their companies. The Bill adds wording to clarify that directors can consider matters other than “profit maximisation”. It specifically lists environmental, social, and governance matters as examples of matters that can be given consideration. 

The Bill – what was proposed in the amendment to the Companies Act

The Bill was proposed as a simple addition to the Companies Act to clarify that directors can take actions which consider matters other than the financial bottom line of a company.

In its original form to Parliament, the Bill stated that directors “may, when determining the best interests of the company, take into account recognised environmental, social and governance factors”. A non-exhaustive list of five factors were listed as examples, which included matters such as recognising the principles of Te Tiriti o Waitangi, reducing adverse environmental impacts and upholding high standards of ethical behaviour.

Feedback received on the Bill

Supporters of the Bill considered that the proposed amendments did not go far enough, and that the Bill should have placed a requirement on directors that then ‘must’ (rather than ‘may’) consider ESG factors when exercising their duty under section 131 of the Act.

In contrast, the Bill received opposition at select committee from various stakeholders, on the basis that while well-intentioned, the Bill was unnecessary, because directors can, and do already, consider ESG matters where relevant and appropriate to assessing the best interests of the company.

Some submitters also suggested that unintended consequences of the legislation if passed could include an increased litigation risk for directors and increasing compliance costs.

The select committee proposed that the Bill be amended to read:

“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.”

Critics of the proposed legislation argued that the amendment achieved little and did not minimise the risks of the original Bill.

Those in opposition to the Bill included the New Zealand Law Society, the Ministry of Business and Innovation, the Institute of Directors and the Legislation Design and Advisory Committee.

At the committee of the whole stage, the amendment was then changed to read:

“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 (for example, environmental, social, and governance matters).”

This has addressed some concerns raised by submitters, for example, reference to “considering” the best interests of the company, is preferred to the original wording (“determining” the best interests of the company) and better aligns with the nature of the duty.

The Bill passed into law

The Bill was subject to debate in the House, but ultimately, passed its third reading. It has received Royal assent and has now become law. While the Bill will be likely to have minimal impact on directors, it will likely act to provide sign-posting to directors of what matters they may consider in the best interests of their companies. 

For advice regarding company matters, including director duties, our specialist commercial lawyers at DTI Lawyers can be contacted by email on [email protected] or by phone 07 282 0174.