Directors' duties - what influences should a director consider?
The aim of a director is, for the most part, to maximise the financial position of a company for the benefit of its shareholders. However, the Companies Act 1993 sets out a number of duties that directors must also adhere to.
These directors’ duties are an important aspect of company law. They set out a director’s obligations to exercise their powers for proper purposes, to avoid reckless trading, to not allow the company to incur obligations that they don’t reasonably believe can be met, and, more generally, to act in good faith and in the best interests of the company.
This latter obligation, to act in good faith and in the best interests of the company, has long been used to justify the focus on financial performance. A new bill before Parliament, the Companies (Directors Duties) Amendment Bill, will amend this duty, to make it clear that a company director can take actions that take into account wider matters, other than the financial bottom-line.
The duty to act in the best interests of the company will be amended to record that a director may take into account recognised environmental, social and governance factors, such as:
- the principles of the Treaty of Waitangi (Te Tiriti o Waitangi);
- reducing adverse environmental impacts;
- upholding high standards of ethical behaviour;
- following fair and equitable employment practices; and
- recognising the interests of the wider community.
These considerations are optional, but the change is in accordance with the operation of many modern corporates, who recognise the importance of their connection with local communities, society and the environment. This change will ensure that directors can consider these factors without being found at fault for failing to maximise profits.
The Bill has just had its first reading in Parliament, and has been referred to the Economic Development, Science and Innovation Select Committee for consideration. Submissions on the Bill are now open, and can be made until 8 January 2023. We’ll continue to update you as the Bill passes through.
For more information on this Bill, or directors’ duties generally, please contact a member of our Corporate and Commercial law team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.