How do you go about acting in someone’s best interests? As a general concept it is easily understood but it can be more of a challenge when putting into practice. What constitutes “best interests” can be subjective.
New Zealand law imposes an obligation to act in a “best interests” manner in a number of areas. One of those areas is when making decisions in the boardroom.
A director has a duty to act in good faith and in what the director believes to be the best interests of the company.
What are the “best interests” of a company?
With the exception of charities, striving towards maximising profit for shareholders is generally considered to be acting in the “best interests” of a New Zealand company.
Company directors are now expressly permitted to consider environmental, social, and other matters in determining what is in the “best interests” of a company, as opposed to just the bottom line.
Case law already permitted wider factors than just profit for interpreting the concept of “best interests” for companies. However, it was not until August 2023 that New Zealand provided legislative authority for directors to consider ESG matters when making decisions.
What are ESG matters?
ESG stands for environmental, social and governance. It is a set of responsibility metrics that is used primarily for investment decision making. Originally used by the UN as a corporate social responsibility initiative, ESG is now a global, trillion dollar phenomenon.
New legislation was introduced last year to clarify that directors may consider ESG matters (New Zealand Companies (Directors Duties) Amendment Act 2023).
Section 131(5) of the Companies Act 1993 now provides that directors may consider “matters other than the maximisation of profit (for example, environmental, social, and governance matters)”.
Not mandatory
Environmental, social and governance considerations are concepts that administrations across the world have been considering. The UK, for example, has introduced compulsory ESG considerations in the boardroom.
Consideration of ESG matters is not mandatory for companies in New Zealand.
Some legal commentators in New Zealand have criticised the changes as being unnecessary as directors already had grounds to consider ESG matters. It is true that a lot of companies were already considering ESG factors before the change. The change also potentially introduces uncertainty with potential increases in litigation risk and compliance cost. The version of the additional wording that ultimately passed through parliament was subject to vigorous debate and a number of changes.
Which bottom line?
We can all recognise the potential conflict between making money and looking after social/environmental factors when making decisions.
The messaging from the Government in codifying permission for directors to act in a socially responsible manner, although imperfect, draws attention to important issues and encourages wider discussion and debate.
Directors might grapple with the question of whether to and/or how to introduce ESG factors into the boardroom, which is not necessarily a negative.
The Courts will ultimately determine what has changed with the introduction of permitted ESG factors into the “best interests” duty. The test remains a subjective one.
Will you consider environmental, social or governance matters at your next board meeting?
