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Stakeholder governance A call to review directors’ duties
ISBN 978-0-473-58586-0 Copyright 2021 Disclaimer: This resource should not be used or relied upon as a substitute for professional advice.
Stakeholder
governance
A call to review directors’ duties
Contents
1. Foreword page 2 >
2.
Background page 3 >
3. The power of purpose page 4 >
4. The ascent of ESG and sustainable finance page 6 >
5. Towards a tipping point for corporate reporting page 8 >
6. Global developments and trends page 10 >
7. Developments in New Zealand page 12 >
8. The New Zealand legal position – a high level view page 14 >
9. Engaging with stakeholders page 16 >
10. Time to review directors’ duties page 17 >
Endnotes page 18 >
Key resources page 20 >
< back to contents
1. Foreword
The world of business is experiencing
a perfect storm – the pandemic, About this paper
climate change and social inequality
Stakeholder governance is one of the
are all presenting business leaders with top issues in global governance. This
some of the most extreme economic paper outlines the evolving corporate
and social dilemmas in generations. governance landscape in relation to
stakeholders including:
The importance and need for robust corporate
governance and leadership are critical to • s
ignificant developments and trends
navigating the challenges ahead. around the world and in New Zealand;
and
The current environment has accelerated the • r elevant law in New Zealand and
need for boards to question and re-examine: guidance for boards.
ow their organisations are operating and
• h
for what purpose; and The paper concludes with a call for the
Government to review the framework
• who they serve and why.
for directors’ duties in the Companies
As stewards and kaitiaki of company value, Act 1993.
boards are increasingly taking a more holistic
view of how their companies create long-term
value, and they are giving greater attention
and recognition to stakeholder interests
(including employees, customers, suppliers,
communities and the environment).
Directors must act “in the best interests” of
their company1 but the challenge is defining
exactly what this means. For example, is
it the primary responsibility of the board
to look after the interests of shareholders
and maximise shareholders’ profits, or
should directors consider the interests of all
stakeholders to discharge their duty of acting
in the best interests of the company?
This question was tested recently when
some of New Zealand’s largest companies
claimed significant wage subsidies from the
Government, and later posted a profit for
the year. Although such companies were
entitled to receive the wage subsidy under the
Government’s criteria, many confronted public
backlash and were faced with a dilemma of
whether to pay back the wage subsidy. Those
boards had to consider the best interests of
their company in light of stakeholder reaction.
This included potentially repaying the subsidy
against prioritising shareholder returns.
2 I stakeholder governance I A call to review directors’ duties2. Background
New Zealanders want to see economic responsibility of business where he stated that
growth but there is an increasing “there is one and only one social responsibility
expectation that businesses also of business—to use its resources and engage
in activities designed to increase its profits so
focus on overcoming social and
long as it stays within the rules of the game.”10
environmental issues.2
It is generally, although not universally,
Millennials and younger generations, for
accepted that New Zealand company law
example, are demanding more and no
is based on, and designed to reflect, the
longer want to work for, invest in or buy
concept of shareholder primacy, which would
from businesses that lack values beyond
dictate that acting in the best interests of the
maximising shareholder profits.3 Consumers
company means acting in the best interests of
are choosing to support businesses with
shareholders.
products and services that have a positive
(or at a minimum, not a negative) impact However, in New Zealand, as in most
on the environment, people or society.4 A jurisdictions with developed corporate
key finding in the Edelman Trust Barometer governance regimes, debate is rising over
2020 was that 87% of people believed that the alleged incompatibility of the shareholder
businesses need to serve the interests of all primacy theory with “stakeholder capitalism”
stakeholders, not only shareholders.5 One of or “stakeholderism.” Stakeholderism
the five key indicators of business trust in the is premised on the idea that a company
Edelman Trust Barometer 2021 is long-term serves not only its shareholders, but all
thinking over short-term profits.6 Being seen its stakeholders – employees, customers,
as a responsible corporate citizen is a valuable suppliers, local communities, the
brand reputation and competitive advantage, environment, and society.
particularly for New Zealand organisations
who participate in the global economy.
In Larry Fink’s 2021 Letter to CEOs he warned
Shareholders
that companies who ignore stakeholders
do so at their own peril.7 The more an Regulators Customers
organisation is able to demonstrate its
purpose in delivering value to stakeholders,
the better able it is to compete and deliver
long-term, durable profits to shareholders.8 Media Employees
There are competing theories about which
interests boards should take into account, or Stakeholders
take priority, when governing a company.
The theory of “shareholder primacy” or Society Suppliers
“shareholder capitalism”9 was popularised
in the 1930s by Adolf Berle who argued that
boards should not be responsible to anyone
other than shareholders. In part, the argument Environment Creditors
is premised on the idea that shareholders Government
bear the most risk by investing capital and
therefore are entitled to expect a reasonable
return on their investment. The theory was
also central to Milton Friedman’s famous
New York Times essay in 1970 about the
JULY 2021 I 3< back to contents
3. The power of
purpose
Defining the company’s purpose Many companies are embedding their
(and values) is a critical component purpose into their wider corporate
of determining a company’s strategy. governance frameworks, for example,
including the purpose in:
It specifies the company’s fundamental
reason for being beyond making a • the company’s constitution;
profit. It helps achieve objectives • director appointment letters;
broader than shareholder returns and • i nduction materials and training
is a key driver of success. for directors that incorporates an
understanding of stakeholders and the
Corporate purpose should: corporate purpose and the impact of the
• a
rticulate why an organisation exists and inclusion of a corporate purpose in the
the issues it seeks to focus on; and company’s constitution;
• c
reate value for both shareholders and • b
oard charters, for example, including a
stakeholders. description of the purpose and impact on
decision-making, and perhaps in respect
The purpose should drive what the business of any nomination and remuneration
does and be integrated in the company’s committee including a requirement that:
strategy. It should not try to be all things to all
–
when directors are appointed to the
people, but rather focus on what the company
board, or new directors are sought,
can bring to the table for its stakeholders.11
demonstrated alignment with the
Formulating a corporate purpose requires purpose and representation of
ownership by the board, and input stakeholder interests is part of the
from management, staff and other key matrix of skills sought; and
stakeholders. It also needs to be accepted –
director and board performance
and supported by shareholders.12 assessments include evaluation of
alignment/adherence to the purpose.
An effective purpose should reflect the overall
outcome for the business and should:
• be concise;
• be aspirational (but achievable);
• g
ive the reason for the company’s
existence; and
• be easily remembered by staff.
It is important that boards provide clear
direction to management to ensure the
business is operating in a manner that is
consistent with its purpose. Directors and
management should be actively testing and
considering “how does this align with the
company’s purpose?”
4 I stakeholder governance I A call to review directors’ dutiesB Corporations
Global initiatives on
Governing for Purpose and Stakeholders in corporate purpose
Aotearoa New Zealand, by B Lab Australia
and New Zealand provides an overview of A number of recent high-profile initiatives
“B Corporations”:13 have promoted the importance of
purpose as companies continue to adapt
“B Corporations (B Corps) are businesses to changing shareholder and stakeholder
that balance purpose and profit, and expectations, including:
hold themselves publicly accountable for
• t he US Business Roundtable Statement
considering the impact of their decisions
on the Purpose of a Corporation (2019);
on their workers, customers, suppliers,
community and the environment. A business • t he British Academy’s paper Principles
can ‘certify’ when it demonstrates it meets a of a Purposeful Business (2019);
rigorous set of governance and management • t he new Davos Manifesto, Universal
requirements, which are administered by the Purpose of a Company in the Fourth
not-for-profit B Lab. Industrial Revolution (2020);
• E
nacting Purpose Initiative’s paper
Originally conceived in the United States,
Enacting Purpose within the Modern
where a share price can benefit at the cost
Corporation: A Framework for Boards
of everything else, the B stands for ‘benefit’.
of Directors (2020); and
B Corps represent the idea that a business
should be legally able to exist for the purpose • U
niversity of Cambridge Institute for
of creating benefits for stakeholders other Sustainability Leadership, Leading
than shareholders. with a sustainable purpose: Leaders’
insights for the development,
Today, there are close to 4000 B Corps in alignment and integration of a
more than 70 countries including in North sustainable corporate purpose (2020).
America, the United Kingdom, Europe, China,
Australia, Latin America and New Zealand.”
B Corps in New Zealand
and Australia14
• N
ew Zealand had one B Corp in 2014,
22 in 2019 and now has 42
• O
ne in every 10 B Corps globally are
based in New Zealand and Australia
• M
ore than 90% of New Zealand and
Australian B Corps have practices and
policies in place that support diversity,
equity and inclusion
• M
ore than 80% of B Corps in New
Zealand and Australia share the benefits
of business growth and help to create
financial security in their workforces
through a high to low pay ratio of 1-5 times
• 9
2% of B Corps are active in addressing
social and environmental issues, through
providing resources, participating in
research, standards setting or forums
JULY 2021 I 5< back to contents
4. The ascent of ESG and
sustainable finance
Boards are giving increasing
emphasis to environmental, social and
governance (ESG) matters and their
relationship to long term performance
and value creation.
Underpinning this is understanding and
responding to the evolving expectations
of investors, consumers, staff, and other
stakeholders. Some examples of ESG
matters include:
Environment Social Governance
Climate change and Human rights and Board composition
carbon footprint modern slavery and diversity
Environmental protection Employment standards Leadership
Biodiversity Health and safety Remuneration
Pollution and resource Fair trade Shareholder rights
depletion
Water use Harassment/discrimination Ethics
Waste management People management Whistleblowing
Energy Diversity, inclusion Disclosure and transparency
and equality
Sustainable procurement Supply chain management Risk management
Privacy and ethics Anti-bribery and corruption
Consumer responsibility Stakeholder engagement
Financial systems around the world are also how the financial system in New Zealand
being radically overhauled “to contribute should be redesigned to meet sustainability
to, rather than hinder, the transition to a low challenges and opportunities now and in the
emissions, resilient, resource efficient, just future. The report explores the purpose, roles,
and inclusive economy.”15 The Roadmap for and responsibilities of business and finance
Action Final Report (2020) by the Aotearoa in society and sets out potential pathways for
Circle’s Sustainable Finance Forum sets out achieving a sustainable system.
6 I stakeholder governance I A call to review directors’ dutiesSustainable finance
Māori values and balancing
Sustainable Finance – A Means to Incentivise multiple bottom lines
Good Outcomes outlines key issues and
trends in sustainable finance in New Zealand:16 The New Zealand Productivity
Commission’s report He Manukura:
“Sustainable finance has grown in popularity Insights from Māori Frontier Firms
in recent years, driven by societal change, (2021) highlights that Māori firms often
banks focusing on their licence to operate incorporate Māori values, principles and
and increasing regulatory pressure. concepts into their operating framework
and these “values translate into an
“Although New Zealand has lagged behind
intergenerational view, which in turn is
other markets, it too has seen rapid growth
reflected in long-term business strategies
in recent years which shows no signs of
and approaches.”17 Kaitiakitanga
slowing. As New Zealand looks to the future
(guardianship), rangatiratanga
to meet its emission reduction goals and as
(leadership, ownership), manaakitanga
a number of entities look ahead to address
(hospitality), and whanaungatanga
climate risks and meet climate reporting
(relationship/kinship) were some of
requirements, it is expected that sustainable
the values, principles and concepts
finance will play an increasingly important
identified as relevant and beneficial to
role in supporting these objectives and
Māori businesses.18 Multiple bottom-line
in promoting environmental, social and
perspectives balancing social, cultural,
governance outcomes…”
commercial, spiritual, political and
“The sustainable finance market sees no environmental needs are also common
signs of slowing, with the global sustainable in a Māori context.19 This operating
debt issuance in 2020 increasing by 29% framework – which includes a focus
from 2019’s total.” on the long-term, sustainability and
intergenerational wealth and wellbeing -
Further increased demand is expected for can provide a competitive edge for New
these products from corporates as they Zealand business on a global stage.
seek to achieve their sustainability goals
and demonstrate their ESG credentials in
response to increased customer, social
and regulatory scrutiny. The benefits of
sustainable finance are recognised by
the International Platform on Sustainable
Finance Annual Report, October 2020
which notes the following:
“We believe that financial institutions,
which are placing sustainability at
the centre of their decision-making
and promoting innovation to solve
environmental challenges, will contribute
to the common good while increasing their
competitiveness.”
JULY 2021 I 7< back to contents
5. Towards a tipping point
for corporate reporting
The world of corporate reporting Reporting has generally been voluntary and
is undergoing significant change organisations have adopted a framework
particularly in relation to extended or form to suit their business, including to
meet investor and stakeholder expectations.
external reporting (EER).
Frameworks, forms and standards relating to
EER refers to broader forms of reporting EER include:
beyond the usual types of information • n
on-financial reporting and standards,
presented in an entity’s financial statements. eg on service performance
The New Zealand External Reporting Board • ESG reporting, eg under NZX guidance
(XRB) describes this as reporting information
• reporting on corporate social responsibility
on an entity’s:
• I ntegrated Reporting (developed by
• purpose and business model
the International Integrated Reporting
• governance Council (IIRC))
• material risks and opportunities • the Global Reporting Initiative (GRI)
• p
rospects (including forward-looking • C
DP a global disclosure system on
financial information) environmental impacts
• strategies • C
limate Disclosure Standards Board
• e
conomic, environmental, social and (CDSB)
cultural impacts. • S
ustainability Accounting Standards
EER is an evolving field and has developed Board (SASB)
to meet increasing expectations from • t he Task Force on Climate-related Financial
investors and other stakeholders to tell a Disclosures (TCFD) framework
more holistic story (eg beyond financials) • t he World Economic Forum’s report
on performance, value, risk and impact Measuring Stakeholder Capitalism:
including on ESG matters. Towards Common Metrics and
Consistent Reporting of Sustainable
Value Creation (2020)
• o
ther sustainability reporting, eg on the UN
Sustainable Development Goals (SDGs).
8 I stakeholder governance I A call to review directors’ dutiesThe number of frameworks and forms of New Zealand is leading the way with the
reporting have created a complex reporting Financial Sector (Climate-related Disclosures
environment but moves to simplify the system and Other Matters) Amendment Bill, which
are gaining momentum. In September 2020, proposes that the following entities will be
five global organisations, CDP, CDSB, GRI, subject to mandatory reporting (on a “comply
IIRC and SASB, issued a Statement of Intent or explain” basis):
to Work Together Towards Comprehensive • a
ll equity and debt issuers listed on
Corporate Reporting, aiming to achieve global the NZX
comparability and reduce complexity.
• a
ll registered banks, credit unions and
Since then, the IIRC and the SASB have merged building societies with total assets of more
to form the Value Reporting Foundation. than $1 billion
The IFRS Foundation is also creating a new • a
ll managers of registered investment
International Sustainability Standards Board to schemes with greater than $1 billion in total
set IFRS sustainability standards. assets under management
• a
ll licensed insurers with greater than
Support for climate-related mandatory
$1 billion in total assets under management
reporting is building, including with the
or annual premium income greater than
backing of the G7 countries in June 2021.
$250 million.
The new reporting regime will be based
against standards issued by the XRB and
developed in line with the global TCFD
framework.
JULY 2021 I 9< back to contents
6. Global developments
and trends
Attention on stakeholders and their regulatory framework on company law
interests are driving governance and corporate governance.21 The aim of
developments in many jurisdictions this is also to enable companies to focus
on long-term sustainable value creation
and this trend is gaining increasing
rather than short-term benefits and to
momentum.
align the interests of companies, their
Key global developments include: shareholders, managers, stakeholders
and society. A number of leaders in
The World Economic Forum business, finance, and academia have
come out in support of the initiative in a
The forum (which is an independent public statement.22
international organisation committed to • H
owever, other prominent European
improving the state of the world by engaging organisations, including the European
business, political, academic and other Confederation of Directors Associations
leaders of society to shape global, regional (which consists of 22 national director
and industry agendas) has been prominent in institutes) in a joint letter strongly opposed
driving change. See for example: some key aspects of the initiative.23 A
• T
he Davos Manifesto 2020: The Universal key concern of the organisations is that
Purpose of a Company in the Fourth new “legal requirements would place
Industrial Revolution which is centred obligations on companies to reconcile
around stakeholders and provides that “the conflicting interests, and any liability
purpose of a company is to engage all its attached to such a requirement would
stakeholders in shared and sustained value lead to legal uncertainty and the risk of
creation;”20 paralysing the functioning of the board
and management.”24 Instead, they support
• T
he future of the corporation – moving
maintaining principles for corporate
from balance sheet to value sheet (2021)
governance in the existing format of codes.
which puts forward recommendations for
companies to achieve effective stakeholder
governance; and United Kingdom
• M
easuring Stakeholder Capitalism: • A
key director duty in the UK Companies
Towards Common Metrics and Consistent Act 2006 is the duty to promote the
Reporting of Sustainable Value Creation success of the company for the benefit of
and Integrated Corporate Governance: its members as a whole and this includes
A Practical Guide to Stakeholder Capitalism reference to specific stakeholders.25
for Boards of Directors.
• U
K companies can have purposes in
their constitutions beyond promoting the
European Union success of the company for the benefit
of members. Where this is the case, the
• S
ome jurisdictions in the EU already utilise
Companies Act 2006 essentially provides
a stakeholder approach to corporate
that directors are legally committed to
governance (eg Germany and France).
achieving those purposes.26
• I n 2020, the European Commission
• S
ome UK companies must also report
established the Sustainable Corporate
on how they have had regard to
Governance initiative to improve the EU
stakeholders.27
10 I stakeholder governance I A call to review directors’ duties• T
here is now a push for further reform. that boards should take into account
A key campaign is the Better Business Act the legitimate and reasonable needs,
that was launched by B Lab UK in April interests and expectations of all material
2021 advocating for changes to the duty stakeholders in the execution of their
to promote the success of the company - duties in the interests of organisations
essentially adjusting the duty to reflect the over time.30
“B Corporation” model where directors • T
he first King Report, named after
would advance the interests of shareholders governance expert and former judge
alongside those of wider society and the Mervyn King, was published in 1994. This
environment (the legal entity remains a was the first of its kind in South Africa and
company). It is now supported by a coalition was ground breaking in advocating an
of over 650 organisations (including the integrated approach to good governance
Institute of Directors UK). in the interests of stakeholders (having
• A
similar proposal to amend the duty to regard to the principles of good financial,
promote the success of the company is put social, ethical and environmental practice).
forward in Amending UK Company Law
for a Regenerative Economy (2021) by the Australia
Regenerative Business Working Group
(associated with the IoD UK Centre for • A
ustralian company directors’ duties are
Corporate Governance). set out in the Corporations Act 2001 and
there are similarities to the duties in New
United States Zealand – for example directors have a
duty to discharge their duties in good faith
• U
S law generally embraces shareholder in the best interests of the corporation and
primacy. In 2019 the US Business a duty of care and skill.31
Roundtable, an association of CEOs of • I n April 2021, the Australian Institute of
America’s leading companies, received Company Directors published a paper
worldwide attention when it made a on stakeholder governance entitled
commitment to stakeholders in the Elevating Stakeholder Voices to the Board:
Statement on the Purpose of a Corporation A Guide to Effective Governance. It has
(moving away from strong shareholder also announced that it has commissioned
primacy messaging in its 1997 Statement a legal opinion on directors’ duties and
on Corporate Governance). stakeholders.32
• U
S Senator Elizabeth Warren has proposed
a federal bill known as the “Accountable OECD
Capitalism Act” providing that large
American corporations should be required The OECD has also announced that it will
to obtain a federal charter which obligates be reviewing the G20/OECD Principles of
directors to consider the interests of all Corporate Governance (last updated in 2015).
stakeholders.28 These principles are critical to aiding policy
• T
here have also been a range of other makers around the world in evaluating and
public statements and publications improving corporate governance.
advocating for change including from
institutional investors, leading lawyers and
academics.29
South Africa
• South
Africa utilises a “stakeholder-
inclusive” approach to corporate
governance under a voluntary code. The
King IV Report on Corporate Governance
(2016), like its predecessors, provides
JULY 2021 I 11< back to contents
7. Developments in
New Zealand
There is also a greater focus in New Investors have also become much more
Zealand on stakeholders. engaged and vocal on stakeholder issues.
It is not just large institutional investors; retail
Regulator expectations of boards have shifted investors are stepping up their expectations –
and increased significantly in recent years. for instance, the New Zealand Shareholders’
A prominent example in relation to Association is developing relevant policies
stakeholders that attracted considerable including on diversity and climate change.
attention was Rob Everett’s (Financial Markets
Authority’s CEO) speech to the Capital An important turning point in the governance
Markets Forum in 2019 entitled Thinking ecosystem was the fundamental overhaul
Beyond Shareholders. He stated:33 of the NZX Corporate Governance Code
in 2017. This included new content on
“Back to what we expect of boards. As the stakeholders and ESG matters. The NZX has
title of this speech makes clear, I’m looking to announced that the code will be reviewed
provoke the discussion about boards serving in late 2021 and consultation is expected to
a much broader set of stakeholders than just include stakeholder/ESG practices among
shareholders.” other topical governance matters. The
FMA’s handbook for directors, executives
“Yes, directors owe their duties to those
and advisors Corporate Governance in New
who entrust their hard-earned capital to the
Zealand: Principles and Guidelines (and
company. Of course. But it is employees too.
its predecessors) includes coverage of the
Many jurisdictions broaden those duties to
board’s role in relation to stakeholders,
their local community, the environment and
as does the Institute of Directors’ Code of
of course in many cases to their regulators
Practice for Directors.
(assuming they operate in a regulated space
of course). Last and not least to customers.
Those who pay for products or services. They
have a right to be treated with respect, not to
be lied to, misled or avoided when they aren’t
happy with how they have been treated.”
“… whether it is customers or employees, the
environment or the communities in which
they operate, I believe companies need to ask
themselves what their purpose is and what
their values are. And if it is purely to make
money at the expense of everyone else they
should not be allowed to operate.”
He concluded by saying “that regulators
and the law should reflect the expectations
and needs of society. And those goal posts
are moving.”34
12 I stakeholder governance I A call to review directors’ dutiesQuestions about New Zealand’s model of “We see a sustainable financial system as one
corporate governance are also becoming where impacts (planet, people and profit) are
more common, for example: afforded equal importance. When considering
• t he Supreme Court in Debut Homes the coverage of our recommendations we
referred to the different models of believe this stakeholder perspective should
corporate governance but found that it did drive threshold settings.”
not need to make a finding on which of the
A key recommendation in the report is that
competing models of corporate governance
environmental and social factors should be
was correct for the purposes of the case.35
included within applicable fiduciary duty
• t he Aotearoa Circle’s legal opinion on legislation – and this is expected to include
climate risk noted the emerging relevance directors’ duties in the Companies Act 1993.40
of stakeholder theory and that “it is
unclear whether and to what extent a New The report also refers to removing barriers
Zealand court could seek to interpret a to purpose-led businesses and investment
director’s duty to act in the best interests models and supports recommendations in the
of the company as indirectly including a paper Structuring For Impact: Evolving Legal
requirement to consider the interests of Structures for Business in New Zealand by
broader stakeholders. That is an issue for the Law Foundation and the Impact Initiative
future discussion and beyond the scope of (a social enterprise sector development
this legal opinion.”36 partnership between Ākina, the Department of
• l eading academics have also been active in Internal Affairs and the Community Enterprise
discussing these matters in the context of Network Trust).41 The paper recommended
companies in New Zealand.37 that New Zealand develop a company model
fit for social enterprise – referred to as an
“impact company.”42 This would involve
In a chapter in Waking the Taniwha,
amendments to the Companies Act 1993
Māori Governance in the 21st Century
to incorporate opt-in provisions for a social
(2021), Julie Cassidy considers
enterprise model.
shareholder primacy and stakeholder
theory and suggests that tikanga sets
an example and provides lessons for
New Zealand non-Māori entities:38
“Māori corporate governance focuses
on long-term goals and the emphasis in
Tikanga on balancing economic, cultural
and environmental factors provides an
appropriate framework for the role of
companies.”
One way forward is signalled in the Roadmap
for Action Final Report (2020) by the Aotearoa
Circle’s Sustainable Finance Forum which sets
out how the financial system in New Zealand
should be redesigned to meet sustainability
challenges and opportunities now and in
the future. Under the subheading “From
shareholder to stakeholder capitalism,” the
report states:39
JULY 2021 I 13< back to contents
8. The New Zealand
legal position –
a high level view
The Companies Act 1993 governs the Section 137
incorporation and organisation of New
Zealand companies. Among other A director must when exercising powers or
things, the Act provides a framework performing duties as a director, exercise the
care, diligence and skill that a reasonable
for defining the relationships between
director would exercise in the same
companies and their directors,
circumstances, taking into account:
shareholders and creditors.
• the nature of the company;
The Act affirms the company as a means of • the nature of the decision; and
achieving economic and social benefits through
• t he position of the director and the nature
the aggregation of capital for productive
of his or her responsibilities undertaken.46
purposes, the spreading of economic risk, and
the taking of business risks.43 We do not consider that this duty prevents
directors from considering a broader range of
The Act encourages responsible
relevant factors beyond shareholders.
management by providing directors with a
wide range of powers while at the same time
providing protection for shareholders and
Section 133
creditors against the abuse of such power.
A director must exercise powers for a proper
To provide for this, the Companies Act 1993
purpose.47 In simple terms, this duty may
sets out overriding directors’ duties.
be said to come into play where a director
exercises powers beyond what is necessary
Section 131 for the director’s role and does so in
accordance with an ulterior motive, ie has an
A director must act in good faith and in what
“improper purpose.”
the director believes to be the best interests
of the company.44 The duty “focuses directors Again, we do not consider that a director
on their fiduciary mandate of loyalty.”45 properly considering stakeholders when
It contains both an objective requirement of exercising their powers in a manner that does
acting in good faith and a subjective measure not prejudice the company or its shareholders
of acting in what the director believes to be or creditors would be at an increased risk of
the best interests of the company. breaching this duty.
Our view is that even if following a strict
shareholder primacy theory, this would not
Section 134
prevent directors from considering stakeholders
A director must not act, or agree to
in their governance of the company. Acting
the company acting, in a manner that
in the “best interests” of the company is
contravenes the Companies Act or the
increasingly being understood to require
company’s constitution.48
active consideration of stakeholders, not least
because they often have a material financial This duty is generally understood to apply to
impact on the company, even if indirect. both positive acts and failure(s) by a director
14 I stakeholder governance I A call to review directors’ dutiesto act where that would be in or result in
a contravention of the Companies Act or Following that line of thought, and in
constitution.49 Constitutions are binding absence of explicit wording in the law
between a company and its shareholders. or in the company’s constitution, some
shareholders may argue (possibly
successfully) that shareholders’
Obligations to consider stakeholders
supremacy should be the guiding
New Zealand law requires directors to principle for directors.
consider the interests of the following This discussion may become critical
stakeholders: in connection with directors’ potential
• t he paramount duty of directors is to act liability when a company is distressed,
in the best interests of their company; and there is a risk of creditors not being
• i t is commonly accepted that directors paid in full due to prior judgment calls
must consider the interests of creditors in of directors to prefer non-financial
their decision-making once the company stakeholders. An amendment to the
becomes insolvent or is near insolvency;50 Companies Act along the lines of the UK
• d
irectors are permitted to make provision Companies Act would be useful in these
for the benefit of employees and former circumstances.
employees of the company in connection In the absence of legislative reform
with ceasing to carry on the whole or part clarifying expressly what is the right
of its business, and this permission is interpretation of the directors’ duties
noted as a qualification of the directors’ contemplated in the Companies Act 1993,
duty to act in the best interests of the a provision in the company’s constitution53
company;51 and permitting the board to consider
• d
irectors must consider shareholders in a stakeholders in its decision-making
takeover scenario (they have an obligation (a stakeholder clause) is an extra layer of
to make a recommendation to shareholders protection. Inclusion of such a clause may
as to whether they accept or reject a assist directors because under section
takeover offer).52 134 they are obliged to act in a manner
that does not contravene the company’s
There is also a myriad of other legislative
constitution, provided of course it is not
provisions in New Zealand which requires
inconsistent with the Companies Act.
directors to consider and provide for the
interests of other stakeholders, such as the In our view, including a stakeholder clause
Health and Safety at Work Act 2015, the in a company’s constitution, particularly
Resource Management Act 1991 and the in listed or widely-held companies, could
Anti-Money Laundering and Countering be helpful to assist directors to navigate
Financing of Terrorism Act 2009, which their duties and decision-making. By
often do not directly align with shareholders’ seeking the approval of shareholders
financial interests. to constitutional change, the company
ensures that the shareholders have
Adopting a stakeholder clause endorsed the matters that directors must
consider in determining what is in the
New Zealand law permits (and best interests of the company. This also
sometimes even mandates) directors to provides directors with some comfort and
consider a broad range of constituencies, confidence in exercising their duties.
and not just shareholders, when
If obligations to consider stakeholder
acting in the best interests of the
interests are enshrined in constitutions,
company. However, there is still room
directors will be obliged to comply with
for shareholders to argue that the duty
them, failing which they will be at risk of
should be aligned with “shareholders’
breaching a duty. It is less clear, however,
return/profitability” as that was the
who would be entitled to sue for breach
original mandate given by investors
and what remedy might be sought.
contributing capital into the business.
JULY 2021 I 15< back to contents
9. Engaging with
stakeholders
The 2020 Director Sentiment Survey • b
eing seen as a responsible company
found that most directors (87%) agree can attract and retain more skilled and
that stakeholder interests are very motivated employees, leading to higher
staff morale, increased productivity,
important to their business.54
lower staff turnover and a continual
Boards have a key role in fostering constructive reinforcement of a company’s market
relationships with (and between) shareholders reputation; and
and stakeholders, encouraging them to • a
company which closely monitors social
engage with the organisation.55 This may or community concerns can develop a
include, among other things, publishing much more responsive and accurate risk
clear policies which communicate the management capacity (and strategy).
goals, strategies and performance of the
organisation, publishing up to date information The New Zealand Productivity Commission
regularly, encouraging shareholders to in its paper New Zealand Boards and Frontier
engage in annual and special meetings and, Firms (2020) noted:57
importantly, also helping shareholders to
“Larger companies have a greater range of
understand that it can be in their interests to
stakeholders, whose views need to be factored
take account of stakeholder interests. While
into decision-making. Boards of bigger
shareholders have contributed capital to the
companies need to be more stakeholder-
enterprise, the success of a business is often
aware (compared to early-stage firms which
due to multiple factors, in which different
might be more shareholder aware). There are
stakeholders (and not just capital) have a
also growing expectations on companies to
pivotal role to play.
be thinking more broadly than shareholder
All boards should identify their key returns – such as environmental and social/
stakeholders and seek to understand their community concerns. However, shareholders
needs, wants and aspirations and how the should not get lost in this process – they
organisation can address or resolve these should be ‘first among equals’ in terms of
interests. As we outlined in our paper, Always stakeholder priority.”
on Duty: The Future Board conducting such
There are various frameworks that boards can
an exercise can be advantageous including for
use to improve stakeholder engagement and
the following reasons:56
governance. For example the IoD UK Centre
• i dentifying the needs, wants and for Corporate Governance’s From Intention to
aspirations of stakeholders (both existing Action – Board Effectiveness in Stakeholder
and latent) can lead to the development Governance Working Group (2021). This sets
of new markets and new business out observations from interviewees about
opportunities, as well as a more accurate the following areas (including challenges and
understanding of existing operations; potential improvement strategies):
• i t can provide a competitive advantage over • formal responsibility for company purpose;
those not attuned to stakeholder needs;
• board stakeholder expertise;
• e
nsuring business operations and policies
• board agenda setting;
align with broad community support can
enhance corporate reputation, strengthen • board level stakeholder insights;
an organisation’s brand, build defensive • o
versight of stakeholder-related issues and
barriers against competitors and a greater deliverables; and
responsiveness to new opportunities; • reporting.
16 I stakeholder governance I A call to review directors’ duties10. Time to review
directors’ duties
Stakeholder governance is now Should I Stay or Should I Go: Directors,
one of the biggest topics in global Leave of Absence and Liability that also
governance. A number of trends and need to be considered.
developments in relation to directors’ Directors have a critical leadership
duties and stakeholders are highlighted role in contributing to the wealth and
in this paper – and it is reasonable wellbeing of New Zealand. They need to
to expect that this will be a topic of be enabled to succeed. A key part of this
ongoing interest in the future. is to ensure that they have clarity and
certainty around their core duties.
In recent times the world of business has
radically transformed and governance has It has been almost 30 years since the
had to keep in step – and try to stay ahead. introduction of the Companies Act 1993.
To stay relevant and at the forefront of
Much more is expected of directors now – governance globally, it is now a timely
greater responsibilities, professionalism, opportunity for the Government to
commitment, leadership, accountability review the framework for directors’
and continuous learning. All eyes are now duties in the Act.
on the board and expectations are high
for how they guide their organisations
towards sustainable success for
shareholders, employees, customers,
and communities.
It is critical that directors have clarity in
relation to which stakeholders they can/ New Zealand and the business
should legitimately have regard to, to community need to debate and
what extent, and whether they can/should discuss this now. We welcome your
give priority to others over the stated feedback to glc@iod.org.nz and we
preferences of shareholders.58 will be engaging with IoD members
and the director community over
This is becoming more urgent, for example coming months.
as demonstrated by the Sustainable
Finance Forum’s recommendation in its
Roadmap for Action Final Report that
environmental and social interests be
included in fiduciary duties.
Earlier this year the Court of Appeal also
highlighted the need for a review of the
directors’ duties in relation to insolvent
trading to ensure that there is a coherent
and practically workable regime.59 Other
stakeholders at the time endorsed this call
including the Institute of Directors.60
There are other issues relevant to directors’
duties such as those raised in our paper
JULY 2021 I 17< back to contents
Endnotes
1 Companies Act 1993 (NZ), section 131. 16 MinterEllisonRuddWatts, Sustainable
2 Sustainable Business Council New finance – a means to incentivise good
Zealand, Social Licence to Operate Paper, outcomes, 2021.
2013, page 2. 17 N
ew Zealand Productivity Commission,
3 See, for example, The Deloitte Global He Manukura: Insights from Māori
Millennial Survey 2020. Frontier Firms, 2021, page 4.
4 See, for example, Edelman Trust 18 Ibid.
Barometer 2021 Special Report: Trust, the 19 Ibid, page 5.
New Brand Equity. 20 World Economic Forum, Davos Manifesto,
5 Edelman, Edelman Trust Barometer 2020, Universal Purpose of a Company in the
page 26. Fourth Industrial Revolution, 2020.
6 Edelman, Edelman Trust Barometer 2021, 21 European Commission, Sustainable
page 36 Corporate Governance initiative.
7 BlackRock, Larry Fink’s 2021 Letter to 22 Andrew Johnston et al, Statement on
CEOs, 2021. Corporate Governance for Sustainability,
8 Ibid. 2020.
9 For the purposes of this paper we have not 23 Better Finance et al, Joint Letter
made a distinction between “shareholder Regarding the European Commission
primacy” and “shareholder capitalism” Initiative on Sustainable Corporate
and use these terms interchangeably to Governance, 2021.
mean the same thing. 24 Ibid.
10 Milton Friedman, The Social 25 Companies Act 2006 (UK), section 172.
Responsibility Of Business Is to Increase 26 Companies Act 2006 (UK), section 172(2).
Its Profits in the New York Times, 1970.
27 Companies Act 2006 (UK), section 414CZA.
11 niversity of Cambridge Institute for
U
28 Accountable Capitalism Act (introduced
Sustainability Leadership, Leading with
in 2018).
a Sustainable Purpose: Leaders’ Insights
for the Development, Alignment and 29 See, for example, Leo Strine, Restoration:
Integration of a Sustainable Corporate The Role Stakeholder Governance Must
Purpose, 2020, page 7. Play in Recreating a Fair and Sustainable
American Economy - A Reply to Professor
12 E
nacting Purpose Initiative, Enacting
Rock, 2020.
Purpose in the Modern Corporation:
A Framework for Boards of Directors, 30 Institute of Directors in South Africa, King
2020, page 6. IV Report on Corporate Governance, 2016.
13 B Lab Australia and New Zealand, 31 Corporations Act 2001 (Australia),
Governing for Purpose and Stakeholders sections 180 and 181.
in Aotearoa New Zealand, 2021. 32 Australian Institute of Company Directors,
14 B Corporations, Better Business: B Corp’s Company Director, March 2021, page 16.
Growth Improving the Future of Business 33 Rob Everett, Thinking Beyond
for NZ press statement, 2021. Shareholders, 2019.
15 Aotearoa Circle website (www. 34 Ibid.
theaotearoacircle.nz, accessed July 2021). 35
Madsen-Ries v Cooper [2020] NZSC 100
(Debut Homes), paragraphs 28-31.
18 I stakeholder governance I A call to review directors’ duties36 Aotearoa Circle/Sustainable Finance 50 Companies Act 1993, sections 135
Forum, Legal Opinion, 2019, page 20. and 136.
37 S
ee, for example, Peter Watts “To whom 51 Companies Act, section 132.
should directors owe legal duties in 52 Takeovers Code Approval Order 2000.
exercising their discretion? — a response
53 If a company also has a shareholders’
to Mr Rob Everett” [2019] CSLB 49 and
agreement (in particular one to which the
Susan Watson “What More can a Poor
company is party) it would be prudent to
Board Do? Entity Primacy in the 21st
record in that document the agreement
Century” (2017) 23 NZBLQ 142.
of the shareholders to the company being
38 Julie Cassidy, “Frankenstein bound by the Stakeholder Clause, both for
Incorporated” v social citizen – Learning consistency with the constitution and to
from Māori Tikanga in framing New avoid shareholder disagreements on the
Zealand Corporate Governance Principles issue.
at page 207 in Waking the Taniwha:
54 Institute of Directors and ASB, Director
Maori Governance in the 21st Century,
Sentiment Survey 2020, 2020, page 15.
Robert Joseph and Richard Benton (eds),
Thomson Reuters 2021. 55 Financial Markets Authority, Corporate
Governance in New Zealand: Principles
39 Sustainable Finance Forum, Roadmap for
and Guidelines, 2018, page 26.
Action Final Report, 2020, page 8.
56 Institute of Directors and
40 Ibid, pages 10, 24 and 26.
MinterEllisonRuddWatts, Always on Duty:
41 Ibid, page 26. The Future Board, 2019, page 18.
42 The Law Foundation and the Impact 57 N
ew Zealand Productivity Commission,
Initiative, Structuring For Impact: New Zealand Boards and Frontier Firms,
Evolving Legal Structures for Business in 2020, page 18.
New Zealand, 2019.
58
Thinking Beyond Shareholders: Time
43 Companies Act 1993. to Define the “Best Interests of the
44 Companies Act 1993, section 131. Company” Lloyd Kavanagh, published
45 Susan Watson and Lynne Taylor (eds), on LinkedIn (7 April, 2019).
Corporate Law in New Zealand (online ed, 59
Yan v Mainzeal Property and Construction
Thomson Reuters) at [16.18.3.1]. Limited (in liquidation) [2021] NZCA 99,
46 Companies Act 1993, section 137. paragraphs 12 and 297.
47 Companies Act 1993, section 133. 60 See, for example, Radio New Zealand,
Covid-19: Business failure numbers still
48 Companies Act 1993, section 134.
below pre-pandemic levels, 2021.
49 Silvana Schenone and Igor Drinkovic,
Duties and Responsibilities of Directors
and Company Secretaries (5th Ed,
Wolters Kluwer, May 2016) at [613].
JULY 2021 I 19< back to contents
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JULY 2021 I 21< back to contents
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solutions and innovative commercial advice. We are trusted
advisors and work alongside our clients to ensure success.
Our offices in Auckland and Wellington are able to access an
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MinterEllisonRuddWatts
+64 21 312 402
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Institute of Directors
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selwyn.eathorne@iod.org.nz
Acknowledgements
We would like to thank MinterEllisonRuddWatts
Senior Solicitor Jasmin Matthews and partners
Andrew Horne and Lloyd Kavanagh for their
contribution to this publication.
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