Turbulent times call for a law review of director duties: white paper

Laws governing directors’ duties need to be reviewed given enormous changes in stakeholder expectations, says a white paper from the Institute of Directors and law firm MinterEllisonRuddWatts.

In a world grappling with a pandemic, climate change and growing social inequality, stakeholder governance is one of the top issues in global governance, said IoD’s Felicity Caird, general manager, governance leadership centre and membership.

“Simply put, this is about companies considering the interests of all relevant stakeholders in decision-making. Of course, this means shareholders, but it also includes regulators, customers, suppliers, employees, the environment, and society as a whole.”

While the focus on stakeholders was not new, social expectations, the rise of ESG (non-financial environmental, social and governance), and unprecedented global issues are driving it up the agenda, Caird said.

Paper co-author Silvana Schenone of MinterEllisonRuddWatts said while the 1993 Companies Act doesn’t prevent directors considering stakeholders in their company governance, there are unresolved questions as to a board’s responsibility around maximising shareholder returns, creating long-term value and the extent to which stakeholder interests should be considered or prioritised.

“The business landscape is radically different from 30 years ago when the Companies Act was introduced. Directors have far greater responsibilities, and much more is expected of them in terms of leadership, stewardship and accountability.

“Directors play a critical leadership role in contributing to the wealth and wellbeing of New Zealand. They need to be enabled to succeed, and this means ensuring there is sufficient clarity and certainty around their core duties and the extent of their responsibilities,” Schenone said.

Clarifying whether the law expects directors to prioritise shareholders’ profitability over other stakeholders’ interests as part of their acting “in the best interests of the company”, was key to this, she said.

The paper said the question of where directors’ primary responsibility lay in ‘acting in the best interests of the company’ was tested with the Covid-19 wage subsidy.

Some of New Zealand’s largest companies claimed significant subsidies from the Government and later posted a profit.

Although they were entitled to receive the subsidy under the criteria, many confronted a public backlash and the dilemma of whether to pay back the 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,” the paper said.

A range of issues relating to director duties in the Act needed attention.

The paper concluded much more is expected of directors now – greater responsibilities, professionalism, commitment, leadership, accountability and continuous learning.

“All eyes are now 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/
should legitimately have regard to, to what extent, and whether they can/should
give priority to others over the stated preferences of shareholders.

“This is becoming more urgent, for example 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.”

The paper noted that 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.

Other stakeholders had endorsed this call, including the IoD.

The paper called on the business community to debate the issue, along with IoD members.

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