Companies exist to mobilise capital, reduce risk and make a profit for their owners. A recent amendment to the Companies Act 1993 aimed to take into account matters other than the financial bottom-line. But is it effective?
Amending the Companies Act 1993
Some years ago a Member’s Bill was introduced amending section 131 of the Companies Act 1993. The amendment had the aim of making clear that a company director, in acting as the mind and will of the company, could take actions that take into account matters wider than the financial bottom-line. This may include matters such as the principles of Te Tiriti (The Treaty of Waitangi), environmental impacts, good corporate ethics, being a good employer, and the interests of the wider community.
The Explanatory Note to Bill stated: “Companies are a useful legal entity for the conduct of many activities. Traditionally they 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 company may seek to promote any number of other objectives. It is for the company and its shareholders to determine the purposes of the company. The pursuit of those purposes are the standard against which the interests of the company, and the conduct of its directors, are to be measured. This Bill makes clear that a director, in acting as the mind and will of the company, can take actions which take into account wider matters other than the financial bottom-line. This accords with modern corporate governance theory that recognises that corporations are connected with communities, wider society, and the environment and need to measure their performance not only in financial terms, but also against wider measures including social, and environmental matters.”
The operative part of the Bill was as follows: “After section 131(4), insert:
My views at the time were that the Bill was pointless.
The amendment simply stated that when fulfilling the primary duty of directors, they may take the above factors into account. There was no doubt about that ability. Those factors and many others exist anyway and could be part of that decision-making process.
The factors had to be “recognised” but by whom? And for each of the factors, how would a director give them content, such as the “interests of the wider community?” Why not add some more like, “animal welfare” or “not prejudicing New Zealand’s international standing in the community of nations” and so on?
The risk was that highlighting these factors could be the basis for arguing that there was a positive duty on directors to take them directly into account (and potential personal liability if they did not). The thrust of the Explanatory Note demonstrated that danger.
Notwithstanding those comments the Bill has been passed but in drastically modified form:
Reinventing the Wheel
The fact of the matter is that companies exist to mobilise capital, reduce risk and make a profit for their owners. They are not charities or social service organisations. If they don’t make a profit, they are put to death (liquidated), and that happens all the time. There are plenty of encouragements and restraints on directors to act in the indicated ways. This occurs by market signals on environment matters or directly via anti-money laundering, trade practices and labour legislation and so on. The Bill simply restates what was already the law. The Act is company law clutter and the resources spent on passing it in its truncated form would have been better spent elsewhere in improving the legislative landscape.
