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University of Otago Law Theses and Dissertations |
Last Updated: 13 April 2024
Ineffective legislation with a plethora of adverse implications: a critical analysis of the Companies (Directors’ Duties) Amendment Act 2023
Hugh Morrison
6 October 2023
A dissertation submitted in partial fulfilment of the requirements of the degree of Bachelor of Laws (with Honours) at the University of Otago – Te Whare Wānanga o Otāgo.
ACKNOWLEDGMENTS
Many thanks to my supervisor, Shelley Griffiths, for taking a gamble on a fourth-year student you had never met. Your guidance has been invaluable.
Thank you to my parents for your endless support throughout my time at University. You have always been an excellent sounding board, constantly challenging my ideas.
To my flatmates and friends, thank you for your support. You have endured constant dissertation chat and given me only the occasional joust. Especially my 90%.
TABLE OF CONTENTS
INTRODUCTION
Environmental, social and governance (ESG) factors have taken the corporate world by storm. Most major stock exchanges now actively promote and expect issuers to have implemented an ESG framework, whilst large financial institutions (sovereign wealth funds, superannuation funds and asset-specific fund managers) have begun prioritising those companies that have met their defined ESG standards.
In light of these global changes, the New Zealand Parliament enacted the Companies (Directors’ Duties) Amendment Act 2023 (the Act), which originated as a member’s bill and represents the introduction of ESG and stakeholder theory into the Companies Act 1993 (the CA). Although a noble gesture, it is nothing more. In seeking to extinguish a shareholder primacy ‘legal norm’ existing in New Zealand corporate governance, Parliament has not only introduced symbolic, ineffective machinery but created a plethora of avoidable implications. This dissertation argues that the Act does not provide utility, but instead has a detrimental effect. It highlights a need for reform. The CA must emphasise the formulation of a company as a separate legal entity, not a collection of shareholders, and clarify that a company’s best interests are those of the entity. Such reform achieves the desired ends of the Act, aided by the influence of market trends, consumers and non-legislative instruments; these forces command stakeholder and ESG-related decision-making to maximise and sustain entity value.
Chapter One discusses ESG and the CA generally, before analysing the legal positions of shareholder primacy and stakeholder theory in New Zealand. The conclusion of this analysis is that while shareholder primacy is (or has been) influential in many global (and local) corporations, it is merely a legal norm rather than a legal directive in New Zealand. This norm overshadows the formulation of a company as a separate legal entity, and the Act’s intended purpose is to extinguish its influence by promoting ESG and by virtue, a transition to stakeholder theory.
Chapter Two draws on United Kingdom dicta and New Zealand’s current legal framework to critically examine the Act’s efficacy at achieving this purpose. It becomes clear that, despite its intentions, it will not effect a transition to stakeholder theory and extinguish the norm of shareholder primacy. This places doubt on its utility.
Chapter Three highlights that whilst the Act will not effect change in New Zealand, it has become enforceable law. By implication, it will introduce a plethora of unintended and adverse consequences, including legal ambiguity and the repercussions of extending the scope of directors’ liability. This places significant doubt on its utility.
Chapter Four answers a critical inquiry promoted by the previous chapters: is legislative intervention the correct means to influence director behaviour? In the context of the Act, the answer is no. In 2023, directors are pushed to make ESG advancements by the imperatives of the market, consumer demand and non-legislative instruments, not by gaining legislative permission.
The Conclusion discusses whether the Act is an appropriate use of legislation, especially when implemented through the member’s bill process. Foreshadowing this dissertation’s conclusion, the arguments presented call for a need to reform the CA to unequivocally clarify the formulation of a company as a separate legal entity. This achieves the Act’s ultimate purpose.
CHAPTER ONE: New Zealand Corporate Governance in Context
1.0 What is ESG?
ESG is a framework to evaluate the sustainability and ethical implications of business decisions, be they (major) investment decisions or within day-to-day company operations.1 This framework has become increasingly prevalent within the corporate governance function as directors use it to evaluate decisions and a metric by which those decisions are accountable.2
ESG is said to embody the three major challenges that companies and wider society are currently facing: climate change, human rights and adherence to laws.3 ‘Environmental’ considerations assess the impact of a company’s operations on the natural world, incorporating carbon footprint, resource usage and efforts to reduce excess waste and pollution.4 The ‘social’ factor pertains to securing a social license to operate, or the acceptance of a company’s activities by stakeholders, communities and wider society; this includes the treatment of employees, customers, suppliers and community outreach.5 ‘Governance’ refers to the structure, policies and procedures by which a company is directed and controlled, including the board of directors (directors) and the rights of shareholders.6 In the context of ESG, governance includes the integration of environmental and social factors referred to as the ‘ES’. Within the corporate decision-making environment, an ESG framework can manifest itself in numerous ways, such as board and management oversight to ensure ESG matters are explicitly reflected in strategic planning and day-to-day risk management.
The first notable mention of ESG was in a 2004 United Nations publication titled ‘Who Cares Wins’,7 a report that encouraged businesses to embrace the concept of ESG over a long-term
1 Investopedia “What Is Environmental, Social, and Governance (ESG) Investing?” (22 March 2023)
2 See generally Monica Billio and others “Inside the ESG ratings: (Dis)agreement and performance” (2021) 28 Corporate Social Responsibility and Environmental Management Journal 1426.
3 At 1427.
4 At 1427.
5 Yonjoo Cho and others “Application of ESG measures for gender diversity and equality at the organizational level in a Korean context” (2020) 45 EJTD 346; and Marta-Christina Suciua, Gratiela Georgiana Noja and Mirela Cristea “Diversity, Social Inclusion and Human Capital Development as Fundamentals of Financial Performance and Risk Mitigation” (2020) 55 Amfiteatru Econ 742.
6 Billio, above n 3, at 1427.
7 United Nations Who Cares Wins (United Nations, 2004).
horizon to connect financial markets to a changing world.8 The recognition of ESG is explained by the growing acknowledgement that corporations have a significant ability to influence the world around them;9 influence that has been amplified through globalisation, a growing number of multilateral trade agreements and trading zones (e.g. European Union), interconnected financial markets and social media. Successful companies’ influence can extend well beyond their local jurisdictions.
These large, successful and well-resourced corporations cast a long shadow; they influence multiple ecosystems, cultures and economies that can vary significantly from the society and physical environment from which they originate. The discipline of defining and acknowledging stakeholders across a wide range of geographies, cultures and legal jurisdictions within an ESG framework is a means through which these corporates can become accountable to an international community.
ESG is gaining momentum. Numerous multi-layered and converging factors have created an environment where responsible corporate conduct of developing, implementing and continually improving ESG frameworks has become normalised. Corporates competing (or wishing to compete) in high value consumer markets, or seeking to attract capital from sophisticated financial markets, benefit from demonstrating a commitment to ESG frameworks.
1.1 The Companies Act 1993 and Section 131
The CA is the central piece of legislation governing a company from its establishment to its operation and management. It both facilitates operation and provides protection.10 According to its long title, the CA reaffirms the value of a company as a means of achieving economic and social benefit, provides basic and adaptable requirements for companies and allows for efficiency by permitting director discretion yet providing protection for shareholders and
8 United Nations, above n 7, at 1-3.
9 See generally Ahmad Hadiqa, Muhammad Yaqub and Lee Seung Hwan “Environmental, Social, and Governance-Related Factors for Business Investment and Sustainability: a Scientometric Review of Global Trends” (2023) Environ Dev Sustain 1.
10 Susan Watson and Lynne Taylor “Introduction” in Company Law - A to Z of New Zealand Law (Thompson
Reuters, 2019) at [16.1.1].
creditors, inter alia.11 Such protections are necessary as companies “can represent privilege and power without accountability”.12 It falls to the board, and thus directors, to ensure compliance with the CA, with the board having responsibilities including strategic guidance, ensuring accountability, monitoring company operations and ensuring appropriate management.13
To achieve these stated outcomes the CA details the duties and responsibilities a director owes to the company. The Companies Act 1955, the predecessor to the CA, did not contain such duties; the CA had the complex job of codifying such duties hitherto found in common law.14 In its 1989 report, which examined and reviewed New Zealand company law in anticipation of the CA, the Law Commission stated that courts “have always insisted that directors exercise their powers in good faith, in the best interests of the company and for the purpose for which they were conferred”.15 When the CA came into force, this focus on directors exercising good faith and acting in the best interests of the company remained. The general and specific duties are contained in part eight of the CA, or ss 131-138B. Section 131(1) is the primary duty of good faith and best interests and a focus of this dissertation:16
131 Duty of directors to act in good faith and in best interests of company
(a) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
Section 131(1) imposes a subjective duty on directors, obliging them to act in a manner they believe to be in the best interests of the company.17 This subjective standard does not, however, absolve directors from decisions or omissions that create foreseeable harm because they ‘believed’ their actions were in the company’s best interests; if a belief is found to be unreasonable, it can be used as evidence that a subjective belief was not, in fact, reasonably
11 CA, title.
12 Watson and Taylor, above n 10, at [16.1.1].
13 Susan Watson “Corporate Governance” in Company Law - A to Z of New Zealand Law (Thompson Reuters, 2019) at [16.14.7].
14 Ministry of Business, Innovation and Employment “Initial briefing to the Economic Development, Science and Innovation Committee” at [7].
15 Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [185].
16 CA, s 131.
17 Madsen-Ries v Cooper [2020] NZSC 100 [Debut Homes] at [109]; and Susan Watson “Duties of Directors – Good Faith and the Best Interests of the Company” in Company Law - A to Z of New Zealand Law (Thompson Reuters, 2019) at [16.18.3.4].
held.18 The Law Commission originally proposed an objective test, whereby an act or omission, even if subjectively believed to be in the best interests of the company, would need to be founded on reasonable grounds.19 However, this was rejected by the legislature and despite the suggestion that common law has tended towards an objective approach,20 the Supreme Court in Madsen-Ries v Cooper (Debut Homes) explicitly confirmed a subjective test for s 131(1); this is consistent with policy considerations and overseas authorities.21
The subjective nature of s 131(1) is not without exceptions and qualifications. These include instances where there is no evidence of actual consideration of the best interests of the company, the interests of creditors have been neglected when insolvent (or nearing so) or a decision appears irrational.22 In essence, directors cannot claim to be acting in the best interests of the company based on their subjective belief alone if they overlook the company’s collective interests or, as required, the interests of current and prospective creditors.23
Section 131 is a duty owed to the company explicitly, not to shareholders or other stakeholders, and thus a shareholder is not able to bring a personal claim alleging a breach against a director.24 However, s 165 of the CA allows an individual to bring an action in the name of, and on behalf of, the company in respect to an injury the company has suffered.25 This is known as a derivative action. Originally held in common law, the CA merely codified this right.26 Generally, such actions occur when a breach brings unrecovered harm to the company; derivative action provides a means by which directors are held accountable to shareholders, and from which losses can be recovered. The shareholder bears no financial burden, as the costs of litigating a derivative action are borne by the company unless the court considers that it would be inequitable or unjust.27
18 Debut Homes, above n 17, at [109].
19 Law Commission, above n 15, at [508]; and Debut Homes, above n 17, at [110].
20 Watson, above n 17, at [16.18.3.4]; Debut Homes, above n 17, at [111]; and see Sojourner v Robb [2006] NZHC 1676; [2006] 3 NZLR 808 (HC) at [102] for example.
21 Debut Homes, above n 17, at [112].
22 At [113].
23 At [114].
24 CA, s 165(6).
25 Lynne Taylor “The Derivative Action in the Companies Act 1993: An Empirical Study” (2006) 22 NZULR 333.
26 Lynne Taylor “The derivative action in the Companies Act 1993” in Company Law - A to Z of New Zealand
Law (Thompson Reuters, 2019) at [16.27.3].
27 Lynne Taylor “Costs” in Company Law - A to Z of New Zealand Law (Thompson Reuters, 2019) at [16.27.9].
1.2 The Companies (Directors’ Duties) Amendment Bill 2021 - Original Form
On 23 September 2021, Labour Party MP Dr Duncan Webb introduced the Companies (Directors’ Duties) Amendment Bill 2021 (the Bill),28 which was supported by the Labour-Green Government of the day.29 Originating as a member’s bill, it proposed to amend s 131 of the CA by inserting a new subsection:30
To avoid doubt, a director of a company may, when determining the best interests of the company, take into account recognised environmental, social and governance factors, such as:
(a) recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi):
(b) reducing adverse environmental impacts:
(c) upholding high standards of ethical behaviour:
(d) following fair and equitable employment practices:
(e) recognising the interests of the wider community
This drafting provided legislative permission for directors, when making decisions in the ‘best interests’ of a company, to overlay broader ESG filters to consider the needs and perspectives of a company’s stakeholders. The Bill was designed to reflect the evolving expectation of companies to consider the impact of their actions on society,31 underscored by a contemporary acknowledgment that “modern corporate governance theory recognises that corporations are connected to communities, wider society and the environment”.32 The Law Commission also appeared to recognise this connection in 1989, albeit stating the CA should not seek to promote “social objectives”.33
The Bill was met with significant criticism, notably by the Ministry of Business, Innovation and Employment (MBIE) which ultimately stated it should not pass.34 MBIE argued that no legislation currently exists to prohibit directors from considering ESG factors, and cited a high
28 Companies (Directors Duties) Amendment Bill 2021.
29 (1 August 2023) 769 NZPD (Companies (Directors Duties) Amendment Bill 2021 – third reading).
30 Companies (Directors Duties) Amendment Bill 2021 (75-1), s 4.
31 Dr Duncan Webb “Notes for Select Committee on the Companies (Directors Duties) Amendment Bill” at [1]- [4].
32 Companies (Directors’ Duties) Amendment Bill 2021 (75-1) (explanatory note). This acknowledgement is reflective of the ascendant influence of ESG discussed in Chapter One at 7-8.
33 Law Commission, above n 15, at [69].
34 Ministry of Business, Innovation and Employment “Departmental Report to the Economic Development, Science and Innovation Committee” at [35].
likelihood of unintended consequences.35 These sentiments were echoed by numerous practitioners, with references to s 131’s subjective nature already being sufficiently flexible to accommodate any considerations deemed relevant (such as ESG). The technical application of the Bill was also argued to create ambiguity, as listing ESG factors inadvertently implies such factors are superior to those not listed, and it was unclear how much weight should be assigned to certain factors. As the Bill was not designed to solve any “clear problem”, nor did it materially change the existing framework,36 critics asserted its enactment would represent a waste of Parliamentary resources.37
1.3 The Companies (Directors’ Duties) Amendment Bill 2021 - Final Form
The Economic Development, Science and Innovation Committee released its report on the original form of the Bill on 8 May 2023. In citing many of the aforementioned critiques,38 which will be examined in Chapters Two and Three of this dissertation, the Committee could not reach consensus as to whether the Bill should pass. It did, however, recommend a new form39 should it be determined by Parliament that the Bill be passed.40 The provision has since been amended by Supplementary Order,41 with the final form reading:42
To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit (for example, environmental, social and governance matters).
This drafting outlines that the maximisation of profits is not the only relevant matter (or factor) a director can consider when acting in the ‘best interests’ of a company. The action of maximising profit is defined as decision-making with the primary purpose of maximising the sum of current and future profits.43 “Matters other than the maximisation of profit” refers to
35 Ministry of Business, Innovation and Employment, above n 34, at [35].
36 At [8]-[23].
37 At [8]-[23].
38 Companies (Directors Duties) Amendment Bill 2021 (75-1) (select committee report) at 2.
39 At 2.
40 At 1.
41 Supplementary Order Paper 2023 (396) Companies (Directors Duties) Amendment Bill 2021 (75-2).
42 Companies (Directors Duties) Amendment Bill 2021 (75-3), cl 4.
43 See generally Prajit K Dutta and Roy Radner “Profit Maximization and the Market Selection Hypothesis” (1999) 66 Rev Econ Stud 769.
decision-making that does not necessarily provide this, but focuses on a broader ESG and stakeholder mandate.
The Bill underwent its third reading on 1 August 2023, when it received 75 ayes and 44 noes.44 The National and Act parties opposed the Bill, while the Labour-Green Government advocated and voted in favour. As such, the Bill received the Royal Assent on 3 August 2023, to become the Companies (Directors’ Duties) Amendment Act 2023. The provision inserted by the Bill (the Amendment) is now contained in s 131(5) of the CA.
1.4 Corporate Governance Theories
The use of “may” in the Amendment makes its application permissible. It is an avoidance of doubt provision, and without a concrete mandate it does not attempt to “substantially change the law” but instead sets out the “purpose of how we [Parliament] would like directors to do business”.45 These statements suggest the Amendment was not designed to achieve profound legal effect. Rather, it is a symbolic change intended to signal to directors what Parliament perceives to be in the best interests of a company. By encouraging directors to focus on matters other than financial profit, the Amendment implicitly recognises that shareholder primacy is a dominant conception of a company’s best interests.46
Shareholder primacy is a corporate governance theory that suggests the main goal of a company is to maximise profit or increase shareholder wealth (by increasing dividends or the value of equity).47 Shareholder primacy is rooted in the notion that shareholders, due to their financial investment, are the ultimate owners and risk-bearers. They are exposed to company failure and
44 (1 August 2023) 770 NZPD (Companies (Directors Duties) Amendment Bill 2021 – third reading).
45 (7 June 2023) 768 NZPD (Companies (Directors Duties) Amendment Bill 2021 – second reading) as stated by Labour MP Camila Belich, the MP in charge of the Bill.
46 See Chapter One at 18-19.
47 David Millon “Radical Shareholder Primacy” (2013) 10 U St Thomas LJ 1013 at 1014; and see generally NC Smith and D Rönnegard “Shareholder Primacy, Corporate Social Responsibility, and the Role of Business Schools” (2016) 134 J Bus Ethics 463.
their profits are tied solely to company performance.48 Owing to this, shareholder primacy posits that directors owe shareholders a paramount duty.
Shareholder primacy emerged from classical economic theory, which views economic participants as rational actors who are motivated by self-interest and the pursuit of profits. In 1970 American economist Milton Friedman developed the ‘Friedman Doctrine’ which stated that “an entity’s greatest responsibility lies in the satisfaction of the shareholders”, and therefore business strategy should be focused on maximising profit to increase dividends and the value of equity.49 It was originally published by the New York Times and became the foundational doctrine of shareholder primacy.
During the 1980s United States of America (US) ‘Mergers and Acquisitions Boom’, a low valuation portrayed vulnerability to a corporate take-over. This meant directors had strong incentives to maintain high stock prices to ensure the independence of their companies;50 decision-making reflected how stock price was (often) more important than operations,51 and it increasingly became the “sole locus of concern and analysis” for directors.52 US corporate law, beginning with the Delaware Supreme Court’s decision in Revlon, Inc v MacAndrews & Forbes Holdings, has further entrenched these principles53 and by the 2000s shareholder primacy was considered the dominant paradigm for corporate governance in the US.54 Today, the US is the largest, most sophisticated and innovative industrial economy in the world.55
48 Marios Koutsias “Shareholder Supremacy in a Nexus of Contracts: A Nexus of Problems” (2017) 38 BULA 136 at 136-141; Ashleigh Heath “Achieving Long-Term Value Through Stakeholder Theory: Proposed Amendments to The Companies Act 1993” 10 VUWLRP 44/2020 at 7 and 32; and Stephen M Bainbridge The Board of Directors as Nexus of Contracts: A Critique of Gulati, Klein & Zolt's ‘Connected Contracts’ Model (UCLA School of Law, 2002) at 4-5 and 26.
49 Milton Friedman “A Friedman doctrine - The Social Responsibility of Business Is to Increase Its Profits” The New York Times (1970).
50 F Sneirson Judd “The History of Shareholder Primacy, from Adam Smith through the Rise of Financialism” in The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability (Cambridge University Press, 2019) 73 at [3.5].
51 At [3.5].
52 At [3.1].
53 Revlon, Inc v MacAndrews & Forbes Holdings, Inc 506 A 2d 173 (Del 1986); and PM Vasudev “Corporate Stakeholders in New Zealand – The Present, and Possibilities for the Future” (2012) 18 NZBLQ 167 at 179. 54 See generally Jeffrey N Gordon “The Rise of Independent Directors in the United States, 1950–2005: Of Shareholder Value and Stock Market Prices” (2007) 59 Stan L Rev 1465.
55 Caleb Silver “The Top 25 Economies in the World” (1 September 2022) Investopedia
Shareholder primacy has been central to its development and growth, and US financial markets successfully attract capital from investors globally, enjoying high GDP per capita.
Despite the dominance of shareholder primacy in the US, it has had an uncertain development in New Zealand. Peter Watts states that prior to the 1993 CA, the legal framework was “a schema based on shareholder primacy”, however its legal role in corporate governance was unclear.56 Corroborating this, in 1989 the Law Commission highlighted “confusion as to whether ‘the best interests of the company’ ... requires assessment of ‘the company’ as the collective shareholders or as the enterprise itself”.57 The CA attempted to reduce this ambiguity,58 and in light of its introduction, the argument that New Zealand is a shareholder primacy jurisdiction is supported by three assertions:59
First, that shareholders are the ultimate decision makers in the company; second, that shareholders are the company, either legally or in practice in a jurisdiction dominated by small and medium enterprises; and third, that either shareholders own the company or, relatedly, even if they do not own the company, shareholders have the strongest claim to have their interests attributed to the company.
These assertions propose justification for equating value to the company with value to its shareholders.60 By virtue, they posit that shareholders are principals to director-agents, who are duty-bound to act in the best interests of the company, and by implication, the shareholders.61 This line of reasoning implies a shareholder primacy perspective. However, such assertions are undermined by an analysis of New Zealand’s statutory framework.
Company decision-making is principally allocated to two bodies: the company meeting and directors.62 Shareholders have the ability to approve major transactions, liquidation and the company’s constitution, and can appoint and remove directors.63 However, the CA confers a
56 Peter Watts Directors’ Powers and Duties (3rd ed, LexisNexis, Wellington, 2022) at 167.
57 Law Commission, above n 15, at [188].
58 See generally Stephen M Bainbridge Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law (UCLA School of Law, 2014).
59 Watson, above n 17, at [16.18.4.3].
60 At [16.18.4.3].
61 Jeron Veldman “The SLE and the architecture of the modern corporation” in Shaping the Corporate Landscape: Towards Corporate Reform and Enterprise Diversity (Hart Publishing, Oxford, 2018) at 61 and 63. 62 Watson, above n 17, at [16.18.4.3].
63 CA, ss 106 and 153.
statutory jurisdiction on directors to manage company business and affairs,64 and the default position is that any resolution relating to company management is not binding on the board.65 Directors, not shareholders, are vested with ultimate decision-making authority; directors powers are “original and undelegated”.66 Although a shareholder can acquire management power in certain situations,67 the CA then designates them a director.68 Therefore, any notion of shareholders as ultimate decision-makers would be unconstitutional; this was illustrated by the Court of Appeal in Attorney-General v Ririnui69 and supported by Supreme Court obiter.70 The statutory framework thus diverges from the notions of shareholder primacy,71 bolstered by the general principle that shareholders typically cannot seek judicial review of directors’ decisions.72
Section 15 of the CA explicitly states that a company is a legal entity that is separate to its shareholders.73 This was established in Lee v Lee’s Air Farming Ltd74 and other case law,75 and is the approach the Law Commission intended when it stressed that a company and its “existing shareholders” are distinct.76 The large number of small-to-medium enterprises registered in New Zealand has meant, however, that viewing a company as a collection of shareholders is a conception that remains potent;77 97 per cent of all New Zealand businesses are classified as small or medium enterprises, meaning the majority of New Zealand companies tend to be owned and operated by one or few shareholder directors.78 Such operators tend to equate the
64 CA, s 128(1).
65 Section 109(3).
66 Stephen M Bainbridge “Director Versus Shareholder Primacy: New Zealand and USA Compared” (2014) NZ L Rev 551 at 564.
67 CA, s 128(3).
68 Section 126(2).
69 Attorney-General v Ririnui [2015] NZCA 160 at [55].
70 Ririnui v Landcorp Farming Ltd [2016] NZSC 62, [2016] 1 NZLR 1056 at [167]. This point was not subject to appeal but received positive treatment by the only Judge who considered the issue.
71 Bainbridge, above n 66, at 565.
72 Watts, above n 56, at 171.
73 CA, s 15.
74 Lee v Lee’s Air Farming Ltd [1961] NZLR 325 (PC) which adopted the principles laid out in Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 (HL).
75 See for example Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson [2005] NZHC 283; (2005) 2 NZCCLR 1042 (HC) at [103].
76 Law Commission, above n 15, at [512].
77 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 230.
78 Mike Smith “Unleashing the power of New Zealand's small and medium enterprises” (30 September 2020) Stuff <www.stuff.co.nz>.
company’s interests with those of the shareholders, given the seemingly limited merit in distinguishing between the two interests.79 However, this is a common-sense conception, not a legal one.
Whilst shareholders in New Zealand own the company, they do not have an interest in the company’s assets.80 This was confirmed by the Court of Appeal,81 which approved the principle stated in Ten Pin Properties Ltd v Bowlarama (NZ) Ltd that “a shareholder has no proprietary interest whether legal or equitable in the assets of the company in respect of which he holds his shares”.82 Shareholders are also prohibited from demanding distributions.83 It is only when the company ceases its ‘life’ that shareholders gain claim to the residue, after creditors have recovered monies owed.84
Another argument pertains to s 131(2) of the CA, which provides that the constitution of a company (company A) may allow its directors to act in the best interests of a parent company, but only when the parent company is the sole shareholder of company A.85 This provision implies a company’s interests cannot be equated with those of its shareholders unless its constitution explicitly permits it.86
As such, it is clear that the legal function of the CA does not actually promote shareholder primacy. Instead, the position is as follows:87
... [The company is an] entity that is an aggregation of capital rather than of shareholders and the role of the board when acting in the best interests of the company
79 Watson, above n 17, at [16.18.4.3].
80 Watts, Campbell and Hare, above n 77, at 17. Principle established by The House of Lords in Macaura v Northern Assurance Co Ltd [1925] AC 619 at 628, regardless of the related shareholder being the only natural human involved in the company.
81 Mahon v The Station at Waitiri Ltd [2017] NZCA 387, (2017) 18 NZCPR 760.
82 Ten Pin Properties Ltd v Bowlarama (NZ) Ltd HC Christchurch M655/89, 18 December 1989 at 2–3.
83 Watson, above n 17, at [16.18.4.3].
84 Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 (CA).
85 Watts, above n 56, at 176.
86 At 176.
87 Watson, above n 17, at [16.18.4.3].
is to make decisions that will maximise and sustain the value of the various forms of interests that comprise the corporate entity.
With the primary focus on the corporate entity, the CA delineates a more holistic approach than that of shareholder primacy; rather than promoting shareholder interests, it commands directors to make decisions that provide value to the overall entity of the company. The entity has primacy, not shareholders. However, despite the CA’s introduction, shareholder primacy has continued to permeate corporate governance in New Zealand. Peter Watts states:88
Shareholder primacy ... remains intrinsic to the Commonwealth model of company law, and although muddying has occurred with the introduction of the Companies Act 1993, shareholder primacy still underlies New Zealand company law.
The Supreme Court in Debut Homes reinforced this by stating that s 131 has traditionally been construed to mean the maximisation of profits, or enhancing of shareholder wealth for the best interests of the shareholders as a whole.89 This implies the tenets of shareholder primacy have “lingered” in common law,90 a notion articulated by the Court of Appeal in H Timber Protection Ltd (in rec) v Hickson International plc which suggested that directors, when acting in the best interests of the company, are to act in the best interests of its shareholders given they own the company.91
Shareholder primacy continues to influence the interpretation of s 131. In the absence of a statutory obligation on directors to prioritise shareholders, shareholder primacy in New Zealand has become a “legal norm” rather than a legal obligation.92 It is through this norm that
88 Watts, above n 56, at 34.
89 Debut Homes, above n 17 at [28]. The Court, however, was not required to determine whether such an approach was correct.
90 Watson, above n 17, at [16.18.4.3].
91 H Timber Protection Ltd (in rec) v Hickson International plc [1995] 2 NZLR 8 (CA) at 13; Watson, above n 17, at [16.18.4.3]; and see also Richard Ciliang Yan v Mainzeal Property and Construction Limited (In Liq) [2023] NZSC 113 [Mainzeal] at [142] where the Supreme Court stated that the interests of a solvent company and its shareholders sufficiently align to see the duties owed to the company as requiring directors to regard the interests of shareholders.
92 Watson, above n 17, at [16.18.4.3]; and Heath, above n 48, at 6. The many converging factors responsible for the development of this norm are not required to understand the Amendment’s context, and thus lay outside the scope of this dissertation.
shareholder primacy remains “alive and well” in New Zealand company law,93 promoting a tendency for directors to “treat the company like an incorporated partnership” and prioritise the interests of shareholders.94 Scholarship thus suggests that New Zealand has adhered “more or less to the traditional principles of shareholder primacy” regardless of the CA’s statutory function.95 This adherence has overshadowed the CA’s emphasis of promoting value to the company as a separate corporate entity.
In proposing the Amendment, it is clear that Parliament was aware of the shareholder primacy norm;96 Labour Party MP Helen White stated shareholder primacy “continues, and yes, it does continue today. It continues to shape our businesses and the responses of our directors”.97 With no statutory directive commanding directors to maximise profit, but nothing to prevent them from doing as such,98 this is the ‘void’ the Amendment seeks to fill. By signalling how directors ‘should’ operate,99 the Amendment is designed to serve a symbolic or political purpose, catalysing a deviation from shareholder primacy into a wider spectrum of lawful corporate responsibilities100 by promoting ESG-guided decision-making.101 In essence, the Amendment represents an attempt to affirm stakeholder theory as the “appropriate approach” to corporate governance in New Zealand,102 and in doing so, extinguish the norm of shareholder primacy.
Stakeholder theory contends that a company should be viewed as a nexus of relationships, all of which deserve protection and recognition, between itself and its stakeholders.103 A stakeholder is “any individual or group on which the activities of the company will have an
93 Peter Watts “Shareholder Primacy in Corporate Law—A Response to Professor Stout” in Corporate Governance After The Financial Crisis (Edward Elgar Publishing, 2012) at 45.
94 Watson, above n 17, at [16.18.4.3].
95 Vasudev, above n 53, at 176.
96 Webb, above n 31.
97 Ian Llewellyn “Friedman’s ghost raised in Directors Duties Bill” BusinessDesk (8 June 2023).
98 Bainbridge, above n 58, at 11.
99 (7 June 2023) 768 NZPD (Companies (Directors Duties) Amendment Bill 2021 – second reading).
100 Webb, above n 31, at [1]-[4]; and see also Watts, above n 56, at 181 who discusses how such legislation is likely intended to be symbolic.
101 Webb, above n 31, at [1]-[4].
102At [3].
103 See generally André Laplume, Karan Sonpar and Reginald Litz “Stakeholder Theory: Reviewing a Theory That Moves Us” (2008) 34 J Manage 1152; and Heath, above n 48, at 32.
impact”, and includes customers, communities, employees and the environment.104 Proponents of stakeholder theory argue that companies rely on stakeholders to facilitate operations, and they pay a high price for the prioritisation of shareholder interests over their own.105 The theory promotes the interests of, and emphasises equal value creation for, all stakeholders involved in a company and thus contrasts shareholder primacy.106 Stakeholder theory and ESG are inextricable, as companies incorporating ESG initiatives will by virtue promote the interests of stakeholders; stakeholder theory is commonly implemented through an ESG mandate, and they have gained prominence synergistically.107
Since the 1980s, stakeholder theory has garnered increasing recognition, prompting scholars to challenge the sustainability of prioritising shareholders’ wealth as the primary business objective. Formally introduced by Robert Edward Freeman in 1984, Freeman held the view that directors should align corporate strategy to satisfy all parties with a legitimate claim to the business.108 The theory has undergone significant development since, with contributions such as John Elkington’s ‘Triple Bottom Line’ in 1994 which introduced three metrics for directors: profit, people and the planet.109
In New Zealand, the drafting and implications of the CA highlight a tacit recognition of stakeholder theory;110 in certain situations, statutory directors’ duties extend to include stakeholders other than shareholders.111 Sections 169(3)(f)-169(3)(g), 135 and 136 illustrate this, having been interpreted to protect the interests of creditors regardless of being drafted as owed to the company.112 This is mirrored in common law, with Nicholson v Permakraft stating the interests of the company are equated to the interests of creditors upon, or nearing,
104 Susan Watson “The economic aspects of the modern company” in Company Law - A to Z of New Zealand Law (Thompson Reuters, 2019) at [16.3.2.1]; and Millon, above n 47, at 1014.
105 Watson, above n 104, at [16.3.2.1]; and Paddy Ireland “Property, Private Government, and the Myth of Deregulation” in Sarah Worthington (ed) Commercial Law and Commercial Practice (Hart Publishing, Oxford, 2003) 85 at 44.
106 Smith and Rönnegard, above n 47, at 474; and see generally Jason Hung Shareholder Primacy Theory vs Stakeholder Theory (University College London, 2020).
107 Siew Peng Lee and Isa Mansor “Environmental, Social and Governance (ESG) Practices and Performance in Shariah Firms: Agency or Stakeholder theory?” (2020) 16 AAMJAF 1 at 2.
108 R Edward Freeman Strategic Management: A Stakeholder Approach (Pitman, 1984).
109 John Elkington Enter the Triple Bottom Line (1994).
110 Watson, above n 17, at [16.18.4.4].
111 At [16.18.4.4].
112 At [16.18.4.4].
insolvency.113 The Court of Appeal confirmed this as a “well-established” rule in 2014.114 An example appears in Vercauteren v B-Guided Media Ltd, where a director who declared shareholder distributions from an insolvent company was found to be in breach of s 131, as such distributions were at law subject to first discharging obligations to creditors.115
Non-legislative regulatory frameworks also illustrate support for stakeholder consideration,116 however the main source of momentum for stakeholder theory resides outside of regulation. The growing acceptance of corporate ESG standards has put stakeholder theory into the limelight by acknowledging the broader societal implications of companies, amplified by shareholder activism and impact investing. This is underpinned by involvement with international agreements and initiatives such as the United Nations’ Sustainable Development Goals117 and the rise of Te Ao Māori in business.118
The rationale for the Amendment is to some extent explained by the benefits perceived to be associated with stakeholder theory.119 By expanding the paradigm of serving solely shareholders, stakeholder theory attaches broader responsibilities to directors that go beyond financial metrics to encompass positive ESG outcomes. Considering the impacts of corporate decisions on diverse stakeholder groups, and deterring practices not providing benefit to society, encourages and mandates a norm of ethical business conduct.120 An ethical focus is argued to create a competitive advantage,121 due to inherent benefits. Such benefits include a
113 Nicholson v Permakraft, above n 84.
114 Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [55]. This position was also confirmed in 2023 by the Supreme Court in Mainzeal, above n 91, at [196] and [142]-[143].
115 Vercauteren v B-Guided Media Ltd [2011] NZCCLR 9 (HC) at [52].
116 See Chapter 4 at 54-56.
117 United Nations “THE 17 GOALS” <www.un.org>.
118 See generally Jason Mika Manaakitanga: Is Generosity Killing Māori Enterprises? (Australian Centre for Entrepreneurship, 2014) which discusses the introduction of cultural elements to business, with an emphasis on beliefs derived from principles such as manaakitanga and kaitiakitanga.
119 E Daniel Shim “Sustainability, Stakeholder Perspective and Corporate Success: A Paradigm Shift” (2015) 4 IJBHT 64 at 67.
120 See generally Thomas Donaldson and Lee E Preston “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications” (1995) 20 Acad Manage Rev 65.
121 JS Harrison and AC Wicks “Stakeholder Theory, Value, and Firm Performance” (2013) 23 BEQ 97; and
Jeffrey S Harrison, Douglas A Bosse and Robert A Phillips “Managing for Stakeholders, Stakeholder Utility Functions and Competitive Advantage” (2010) 31 SMJ 58 at 58-59.
higher likelihood that consumers will continue to do business with a company,122 lower cost of capital, strong ability to attract and retain employee talent,123 and the intangible value of reputation or ‘good will’.124 With this comes the expectation that companies are transparent and provide information about the societal and environmental effects of their operations.125
One of the most well-recognised implementations of stakeholder theory was achieved by Unilever, one of the world’s largest consumer goods companies with a significant presence in New Zealand.126 Catalysed by extensive CO2 emissions, it launched a ‘Sustainable Living Plan’ in 2010 with the aim of decoupling company growth from the growth of its environmental footprint.127 The Plan involved commitments to source all raw material sustainably, eliminate supply chain deforestation and reduce CO2 emissions, inter alia.128 It is clear these initiatives had positive implications for broader society, but they also provided Unilever a long-term competitive advantage. By 2018, Unilever’s ‘Sustainable Living’ brands grew 46 per cent faster than the rest of the business, and accounted for 70 per cent of turnover growth.129 This suggests strong consumer preference for ethically-orientated brands, and supports the validation of a stakeholder approach.
Stakeholder theory delineates a framework that encourages directors to formulate strategies that balance financial outcomes with the societal impacts of corporate action, promoting equal value creation for all corporate stakeholders. It is the antithesis of shareholder primacy.
122 Ali Raza and others “The moderating influences on the relationship of corporate reputation with its antecedents and consequences: A meta-analytic review” (2015) 68 J Bus Res 1105 at 1113-1114.
123 Turban DB and Cable DM “Firm Reputation and Applicant Pool Characteristics” (2003) 24 J Organ Behav 733 at 746.
124 See generally Peter W Roberts and Grahame R Dowling “Corporate reputation and sustained superior financial performance” (2002) 23 Strateg Manag J 1077. These benefits will be discussed further in Chapter Four at 46-52.
125 See generally Rebs T and others “Stakeholder influences and risks in sustainable supply chain management: a comparison of qualitative and quantitative studies” (2017) 11 Bus Res 197.
126 Unilever “Select Location” <www.unilever.com>.
127 Unilever “2010 – 2020 – The birth of Unilever’s Sustainable Living Plan” <www.unilever.com>.
128 Unilever “Planet and Society” <www.unilever.com>.
129 Unilever “Unilever’s Sustainable Living Plan continues to fuel growth” <www.unilever.com>.
1.5 Conclusion
This chapter has distinguished the paradigms of shareholder primacy and stakeholder theory, establishing the context necessary to understand the purpose, efficacy and complexities of the Amendment. While the maximisation of shareholder wealth is (or has been) the primary objective in many global (and local) corporations, the function of the CA mandates broader corporate responsibilities; it does not promote shareholder primacy but delineates a more holistic approach focused on the corporate entity. This approach, however, has been overshadowed by a de facto legal norm that favours shareholder primacy. The Amendment directly challenges this norm by promoting the consideration of stakeholders, building on the emerging trend of ethical governance and the integration of ESG practices globally, but with limited probability of success and unintended consequences.
CHAPTER TWO: Efficacy of the Amendment
The Amendment is a legislative attempt to extinguish the norm of shareholder primacy in New Zealand by promoting stakeholder theory, amid a global trend of sustainable governance.130 Given this backdrop, it becomes essential for this dissertation to explore whether the Amendment will be successful at achieving this end; its efficacy underpins its utility. As such, this chapter will critically assess the approach taken by the Amendment, and explore whether the current framework in New Zealand is conducive to such a change. Parallels with the approach taken in the United Kingdom (UK) and pertinent provisions of the CA will be examined, illustrating that the Amendment is unlikely to achieve its aspirational aim.
2.0 Approach in the UK
A company in the UK has a similar structure to that in New Zealand; it is a separate entity distinct from its shareholders, and directors are the ultimate decision-makers.131 The duties a director owes to a company are enshrined in ss 171-177 of the UK Companies Act 2006.132 These sections codified, for the most part, the common law rules and equitable principles upon which they are based.133 The UK’s ‘best interests’ duty is contained in s 172(1):134
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
130 See Chapter One.
131 Geoffrey Morse and others “The company as legal person” in Palmer’s Company Law (Thomson Reuters, UK) at [2.1501].
132 Companies Act 2006 (UK), ss 171-177.
133 Paul Davies “Directors’ Duties” in Introduction to Company Law (3rd ed, Oxford Academic, 2020).
134 Companies Act 2006 (UK) s 172(1).
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and(f) the need to act fairly as between members of the company.
Section 172(1), like s 131(1) of the CA, is a subjective duty.135 A director must honestly believe that their act or omission is in the best interests of the company,136 however in making that act or omission they are to have regard to listed ESG factors. Section 172(1) is similar to the Amendment, with both relating to the consideration of ESG by directors when performing their duty. However, s 172(1) requires a director to have regard to ESG considerations, whilst the Amendment allows such considerations; unlike the Amendment, the drafting of s 172(1) purports to impose a mandatory obligation on directors.
Prior to the introduction of s 172(1),137 UK common law symbolised shareholder primacy138 and commanded that the best interests of the company be considered with no parallel obligation to other stakeholders.139 However, by “empower[ing] stakeholder engagement in companies” and recognising the importance of considering a wide range of factors in promoting corporate success,140 s 172(1) was intended to catalyse a deviation from shareholder primacy (much like the Amendment).141 Owing to this intention, the UK Parliament contended, before its introduction, that s 172(1) was a “major step forward” albeit “controversial”.142
The UK Supreme Court in BTI 2014 LLC v Sequana SA and others (Sequana) provided commentary about how the non-exhaustive list of factors in s 172(1) should be applied in
135 Geoffrey Morse and others “Duty to Promote the Success of the Company: Companies Act 2006 s.172” in
Palmer’s Company Law (Thomson Reuters, UK) at [8.2609].
136 At [8.2608].
137 The Company Law Reform Bill 2005 (UK) created s 172(1).
138 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [Sequana], at [65] and [386].
139 At [386].
140 (6 June 2006) 447 (Company Law Reform Bill – second reading).
141 Above n 140.
142 Above n 140.
practice, and whether they have successfully facilitated a deviation from shareholder primacy.143 Over 20 years later, the Court reinforced the testament that a duty to promote the success of the company coupled with an obligation to consider the interests of other stakeholders, substantially breaks tradition.144 The UK’s emphasis on shareholder primacy however was not, regardless of Parliament’s intention, eradicated by the introduction of s 172(1).145
Section 172(1) states a director’s duty is to “promote the success of the company for the benefit of its members as a whole”.146 In the UK, the ‘members’ of a company are considered to constitute shareholders.147 Shareholders occupy “prime position” given they are the most suitably placed to ensure directorial accountability and bear the financial risk with the weakest claim to residual funds.148 This means the motive for acting in the best interests of the company is to create benefit for shareholders or enhance their value.149
To some extent, s 172(1) constrains this motive by endorsing the consideration of stakeholder interests. However, such considerations are only required in so far as they provide benefit to shareholders, and there is no particular criteria nor time metric that makes directors accountable to stakeholders.150 Section 172(1) thus created, in essence, qualified shareholder primacy.151 Other interests may diminish or have superiority over the interests of shareholders in certain situations, but shareholders remain the primary consideration.152 Directors can consider ESG and the interests of stakeholders as a vehicle to maximise shareholder wealth, however they
143 Sequana, above n 138.
144 At [386].
145 At [65] and [386]; see generally Lucian A Bebchuk, Kobi Kastiel and Roberto Tallarita “Does enlightened shareholder value add value?” (2022) 77 Bus Law 731; and Lisa Benjamin “The Responsibilities of Carbon Major Companies: Are They (and Is the Law) Doing Enough?” (2016) 5 TEL 353 at 359 which states that
s 172(1) “codified” the shareholder primacy approach.
146 Companies Act 2006 (UK), s 172(1).
147 Sequana, above n 138, at [386]; Geoffrey Morse and others “The Status of Membership” in Palmer’s Company Law (Thomson Reuters, UK) at [7.001]; and Paul Davies “The Board” in Introduction to Company Law (3rd ed, Oxford Academic, 2020).
148 Sequana, above n 138, at [386].
149 At [386].
150 Davies, above n 147. This is also relevant to the Amendment, see Chapter Two at 31-33.
151 Sequana, above n 138, at [386].
152 At [386]; and Beate Sjåfjell and others “Shareholder Primacy: The Main Barrier to Sustainable Companies” in Company Law and Sustainability: Legal Barriers and Opportunities (Cambridge University Press, 2015) 79 at 92-93.
are not necessarily required to.153 This is known as ‘enlightened shareholder value’.154 If the interests of the company conflict with the interests of individual stakeholders, the priority is given to the interests of the company itself, or those of its shareholders.155 Essentially, s 172(1) encourages stakeholder consideration to achieve value to the company (for the benefit of shareholders) rather than promoting the interests of stakeholders directly.156
Section 172(1) has not altered the prevailing focus on shareholder primacy in the UK. A director’s primary goal remains the advancement of shareholder wealth; in practice, s 172(1) merely acknowledges a director’s ability to consider stakeholders. As such, a successful challenge centred on a decision that neglects the interests of a stakeholder listed in s 172(1), but promotes shareholder wealth, is seemingly unplausible. This was highlighted by the UK High Court in ClientEarth v Shell Plc & Ors (ClientEarth).157
ClientEarth is a private non-profit environmental law organisation and a UK-registered charity.158 It holds a limited number of shares in Shell Plc (Shell), and filed a derivative action claim against Shell’s directors. ClientEarth alleged a breach of s 172(1) caused by a purported mismanagement of Shell’s climate change strategy; it was based on directors’ actions negatively affecting the community and environment. The broad scope of considerations listed in s 172(1) was the machinery relied upon by ClientEarth to facilitate the claim.159
The duty under s 172(1) was said by ClientEarth to induce “six necessary incidents of the statutory duties when considering climate risk for a company such as Shell”.160 These related to placing appropriate weight on climate change issues, the long-term financial profitability of Shell when transitioning under global temperature goals and being in control of climate-related
153 Sjåfjell and others, above n 152, at 91-92; and Andrew Keay The Enlightened Shareholder Value Principle and Corporate Governance (Routledge, 2013) at 136.
154 Rosemary Teele Langford “Best interests: multifaceted but not unbounded” (2016) 76 CLJ 505 at 524.
155 At 521-528.
156 Pablo Iglesias-Rodríguez ClientEarth v Shell plc and the (Un)Suitability of UK Company Law and Litigation to Pursue Climate-Related Goals (Oxford Academic, 2023) at 3-5; and Morse and others, above n 135, at [8.2605].
157 ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch) [ClientEarth].
158 At [1].
159 At [14].
160 At [16].
risk management.161 The UK High Court, when denying to grant leave for ClientEarth, agreed with Shell that such claims relating to the environment are “inherently vague and incapable of constituting enforceable personal legal duties”, and run contrary to the principle that directors themselves are responsible for determining the weight attached to the factors listed in s 172(1).162 These duties formulated by ClientEarth cut across Shell’s general duty to have regard to the many competing considerations relevant to promoting the success of the company.163 Shell’s impact on the community and the environment is a matter that directors balance per s 172(1), but the merits of Shell’s responses are not to be questioned by the courts which are not a “kind of supervisory board”.164
The UK High Court’s approach to ClientEarth’s arguments highlights that s 172(1) lacks any real “teeth”.165 It is subjective, and cannot be interpreted to command a director to consider the interests of stakeholders directly. With no successful examples of such a challenge in UK courts, scholarship criticises the provisions of s 172(1) in that they are difficult to enforce and make little or no practical difference.166
2.1 Will the Amendment Effect Change in New Zealand?
If attempting to mandate ESG considerations in the UK did not shift the focus from shareholder primacy, it is improbable the Amendment, which merely allows ESG considerations, could effect such a change in New Zealand. There was never an intention to draft the Amendment in a mandatory nature, shown by a Green Party supplementary order paper,167 where the proposal to do so was overwhelmingly rejected with 104 noes.168
161 ClientEarth, above n 157, at [16].
162 At [18]-[19]; and Iglesias-Rodríguez, above n 156, at 6. These assertions are relevant to the Amendment in a New Zealand context, and will be discussed in Chapter Two at 29-33.
163 ClientEarth, above n 157, at [18]-[19].
164 At [25].
165 David Goodman and Tom Mohammed “Companies (Directors Duties) Amendment Bill – A shift towards the stakeholder view of corporate governance” (5 November 2021) Anderson Lyod <www.al.nz>.
166 See generally D Fisher “The Enlightened Shareholder - Leaving Stakeholders in the Dark: Will Section 172(1) of the Companies Act 2006 make Directors Consider the Impact of their Decisions on Third Parties” (2009) 20 ICCLR 10; and SF Copp “Section 172 of the Companies Act Fails People and Planet?” (2010) 31 Co Law 406.
167 Supplementary Order Paper 2023 (399) Companies (Directors Duties) Amendment Bill 2021 (75-2).
168 (26 July 2023) 769 NZPD (Companies (Directors Duties) Amendment Bill 2021 – Committee of the Whole House).
This conclusion may appear weakened by the wording of s 172(1), specifically its inclusion of ‘for the benefit of the members as a whole’, which is absent from the CA. Prima facie, as ‘members’ is interpreted to mean shareholders,169 these words obstruct a shift to stakeholder theory by giving inherent primacy to the interests of shareholders. Nevertheless, the ultimate goal of s 172(1) is to promote the success of the company (not shareholders), and regardless of who is intended to benefit from that success,170 the provision was designed to mandate the direct consideration of stakeholders. However, it has failed to achieve that end; only when it is in the best interests of shareholders can a director consider other stakeholders.
The UK’s experience is a strong reference point, however the social and economic climates in which s 172(1) and the Amendment were introduced are different; the now present social sentiment of ESG indicates the reception of the Amendment may differ from that of s 172(1). Despite this, there are significant factors in New Zealand’s current legal framework that detract from the Amendment’s efficacy at achieving a transition to stakeholder theory.
a) Stakeholder consideration is already permitted
As discussed, the CA’s framework does not currently promote shareholder primacy, meaning “profit maximisation ... is not the only interest that boards can legitimately consider in their decision-making”.171 The CA allows directors to consider all relevant factors assuming they are pursuant to the best interests of the company,172 meaning consideration of a particular stakeholder can flow from a decision made “in the interests of the corporation as a single, undifferentiated entity”.173 Such interests are not fixed but evolve throughout a company’s life.174 This was emphasised by Jessica Palmer who stated “the interests of the company should be understood in light of the company’s changing life cycle”.175 As such, the needs of the
169 Sequana, above n 138, at [386].
170 Which in the drafting of s 1721(1) is the members (shareholders).
171 Watson, above n 17, at [16.18.4.4].
172 Legislation Design and Advisory Committee “Companies (Directors Duties) Amendment Bill” at [8]; and Watson, above n 17, at [16.18.4].
173 Lymon PQ Johnson and David Millon “Recalling Why Corporate Officers are Fiduciaries” (2005) 46 Wm & Mary L Rev 1597 at 1644.
174 Watson, above n 17, at [16.18.4.4].
175 Jessica Palmer “Understanding the Director’s Fiduciary Obligation” (2006) 12 NZBLQ 315 at 315.
company at the time will determine the benefit received by certain stakeholders; for example, in periods with high retained earnings, shareholders may receive distributions, but in doubtful solvency periods, decisions will be made to benefit the creditors.176 This was illustrated in Nicholson v Permakraft, where the Court suggested the best interests of the company is dependent on the needs of the company at the time. In that case, this was shown through the increased prioritisation of creditors in certain situations.177
Directors can consider and form relationships with stakeholders if the purpose is to maximise and sustain value to the entity of the company; there is no legal restriction on their right to do so.178 The Amendment does not make possible anything that was previously impossible, suggesting it is rational to conclude its effects on director behaviour will be immaterial.
b) The business judgement rule
The business judgement rule essentially means as long as directors are not fraudulent, illegal or irrational, the court will refrain from second-guessing their decision-making;179 it is a presumption of good faith, meaning directors operate “knowing that ... those cases that do [get into the court system] are unlikely to result in judges second-guessing them”.180 Business judgement is suggested in the long title of the CA, which states that allowing “a wide discretion in matters of business judgement” is a priority,181 and reflected in the subjective operation of s 131.182 As such, the Amendment’s efficacy at encouraging stakeholder considerations is constrained by a director’s ability to make subjective choices as to what they believe to be in the best interests of the company.183 Directors are not obliged to give reasons nor consider “all relevant considerations and ignore what may be regarded as irrelevant”,184 and as
176 Watson, above n 17, at [16.18.4.4]
177 Nicholson v Permakraft (NZ) Ltd, above n 84; and Palmer, above n 175, at 331-332.
178 Watts, above n 56, at 163-175.
179 Watts, above n 56, at 167-174; and Iglesias-Rodríguez, above n 156, at 5.
180 Watts, above n 56, at 183; and Lynn Stout The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (Berrett-Koehler Publishers, San Francisco, 2012) at 24.
181 CA, title.
182 Subjective operation confirmed in Debut Homes, above n 17, at [109].
183 Watts, above n 56, at 167-174.
184 At 172.
aforementioned, shareholders are not generally entitled to judicially review the decisions made by directors.185
Thus, what a director considers to constitute the best interests of the company will vary due to dependence on a multitude of factors, including personal preference and experience. This allows for bias and business judgement to impact decision-making. If a director believes considering stakeholders will benefit the company, they may do so, but if they do not, then they are not obliged to. This will not change with the implementation of the Amendment.
The Amendment’s efficacy is reliant on machinery making directors accountable to it.186 Given the absence of such machinery, both in the CA and the Amendment itself, a divergence between the Amendment’s aims and the actual behaviour of directors is permitted.
Permissible legislation, characterised by the outlining of allowable actions rather than compulsory directives,187 inherently induces an accountability deficit. As the Amendment lacks a concrete mandate, courts will struggle to enforce, or promote, what it is allowing, and be forced to exercise substantial discretion when interpreting Parliament’s purpose in enacting such legislation.188 This is an issue scholars have raised with US constituency statutes,189 which are rules suggesting a board should have regard to the interests of all corporate stakeholders when decision-making.190 These statutes are similar to the Amendment, and are generally permissible in nature. Scholarship suggests they provide “very little” actual protection to stakeholders owing to their permissible nature, as they cannot be interpreted as mandating duties to consider stakeholders.191
185 Watts, above n 56, at 172.
186 LA Stout “The Mythical Benefits of Shareholder Control” (2007) 93 Va L Rev 789 at 798.
187 FAR Bennion “The nature of discretion” in Understanding Common Law Legislation: Drafting and Interpretation (Oxford Academic, 2009) 131 at 131.
188 At 131-140.
189 Bainbridge, above n 58, at 6-7.
190 Brett McDonnell “Corporate Constituency Statutes and Employee Governance” (2004) 30 Wm Mitchell L Rev 1227 at 1231.
191 Bainbridge, above n 58, at 6-7.
However, this argument becomes less potent when considering a stakeholder (who is not a shareholder) has no available mechanism to commence legal proceedings against a director in the first instance. Whilst this remains true, there is no adequate check and balance framework guiding directors to comply with and incorporate the broader set of considerations permitted by the Amendment.192 In other words, there are limited legal mechanisms ensuring directors are not simply paying lip service to these considerations, creating tokenism and tick-box directorship rather than substantive consideration of stakeholder interests and enforceable obligations. According to Peter Watts, “[few] interest groups would be satisfied with token rights”.193 This was the consensus taken by Australia when it reviewed its corporate governance framework:194
Australia chose not to adopt ... [an approach like the UK’s] in 2006 ... Australia considered that the UK’s approach simply made directors less accountable to shareholders without actually enhancing the rights of stakeholders, as stakeholders were not afforded any enforcement mechanisms.
With no clear pathway for redress, it remains unclear how conflicts arising from disagreements over directorial decisions would be resolved by stakeholders in practice.195 It appears the Amendment’s enforceability would rely on self-governance, which can create a disparity between what is legally outlined and the practical handling by directors. To counteract this, it is likely board charters might be adopted. Board charters are formal documents that provide a framework for how directors will function and deliberate on the issues concerned.196 However, they merely constitute an internal framework and lack legal enforceability.
The lack of direct redress is justified practically. With a diverse and large number of stakeholders inherent in any business, interests are often conflicting and multidimensional.197 To provide all stakeholders with a direct method of redress would lead to significant difficulties
192 See generally RK Mitchell, BR Agle and DJ Wood “Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts” (1997) 22 Acad Manage Rev 853.
193 Watts, above n 56, at 182.
194 Goodman and Mohammed, above n 165.
195 See generally David Millon “Two Models of Corporate Social Responsibility” (2010) 47 Wake Forest L Rev 521; and Chapter One at 10 explaining that a stakeholder who is also a shareholder is an exception given s 165 of the CA.
196 New Zealand Institute of Directors “Board charter sample” (2014) <www.iod.org.nz>.
197 See generally Bainbridge, above n 58.
and be legally unworkable. Consequently, it will ultimately fall to shareholders to right perceived wrongs committed against stakeholders through a derivative action. Shareholders, however, have diverging and differing access to information.198 As such, opinions on company strategy will vary widely,199 and investment horizons, especially for listed companies, will range from short-term speculation to long-term buy-and-hold strategies.200 This induces inherent tension between shareholders, creating misaligned objectives relating to stakeholders and thus practical difficulty in enforcing stakeholder consideration.
The lack of a concrete mandate, coupled with no machinery making directors accountable, significantly restrains the Amendment’s ability to catalyse any change.
2.2 Conclusion
Drawing on the UK’s experience, with s 172(1) as a reference, this chapter has critically examined the Amendment’s efficacy at catalysing change in New Zealand. It is clear that, despite its intentions, the Amendment is unlikely to effect a transition to stakeholder theory and extinguish the norm of shareholder primacy. This conclusion is supported by:
(a) The UK’s adherence to shareholder primacy regardless of s 172(1)’s introduction;
(b) New Zealand’s legal framework already accommodating the consideration of stakeholders;
(c) A director’s ability to exercise business judgement; and
(d) The Amendment’s absence of an accountability mechanism.
Nevertheless, the New Zealand Parliament still supported the Amendment. It is enforceable law. By virtue, several adverse implications on the CA and New Zealand’s corporate governance framework will ensue.
198 Bainbridge, above n 58, at 19.
199 At 19.
200 At 19.
CHAPTER THREE: Consequences of the Amendment
Despite the Amendment being unlikely to achieve its desired end,201 it does not follow that amending the CA will be without detriment. The following chapter will address the practical implications of the Amendment on New Zealand’s corporate framework; it will create numerous adverse implications, including legal ambiguity and the consequences stemming from increasing the scope of directors’ liability. This places further doubt on its utility. This chapter illustrates the difficult process of translating ideology into enforceable law, emphasising the practical considerations and challenges inherent in such a legislative undertaking.
3.0 Ambiguity
Law is generally capable of “being understood in more ways than one”, leading to doubt and uncertainty.202 In certain situations the drafting of legislation is more susceptible to these effects, especially when there is a lack of clarity about the application of a term or terms.203 The Amendment is one of these situations. Owing to its permissible nature and lack of a concrete mandate,204 the Amendment’s drafting creates confusion and inconsistencies in its application.
It has been established that matters “other than the maximisation of profit” refers to decision-making that does not necessarily provide profit, but focuses on a broader ESG and stakeholder mandate.205 However, within this focus, the exact factors to which the Amendment refers to is unclear; it does not define nor delimit those applicable. This creates inherent ambiguity, as directors are unable to confidently make decisions aligning with the
201 See Chapter Two.
202 Sanford Schane “Ambiguity and misunderstanding in the law” (2002) 25 T T Jefferson L Rev 167 at 167.
203 At 167.
204 See Chapter One at 13.
205 See Chapter One at 12-13.
Amendment’s signalling. The weight that should then be applied to these factors, and how they should be prioritised, is also unclear.206 As per Sequana:207
A regime in which directors found themselves owing different duties to several different ‘masters’, some with interests conflicting with those of others, would make it extremely difficult for directors to decide what weight to give to each.
This uncertainty, and subsequent difficulty, arises because there is no “universally accepted methodology” to best consider such factors, making the task inherently vexed.208 This is in part due to the novelty of corporate decisions, and the tendency of directors to apply business judgement to decision-making, which is encouraged by the CA.209 In practice, the Amendment is thus capable of being interpreted in a variety of ways, and it is unclear how it should be applied.210 Some directors may prioritise shareholder interests, whereas others may feel compelled to place significant weight on the interests of other stakeholders.
The intrinsic inconsistency of ESG factors adds further complication. Although interconnected, ESG factors can be misaligned, creating instances when prioritising one ESG dimension inadvertently detriments another. Such situations are not uncommon.211 For instance, an investment opportunity in renewable energy, which aligns with environmental objectives, may inadvertently harm the local community, thereby conflicting with social responsibility goals. Without a concrete mandate, the Amendment is not clear about how directors should approach such a dilemma.
By existing in an isolated subsection, the Amendment is ‘elevated’ to a position of greater prominence.212 Directors may subsequently feel obliged to prioritise its considerations, regardless of the intricacies of a particular decision, which undermines the influence of subjectivity and business judgement.213
206 Legislation Design and Advisory Committee, above n 172, at [16].
207 Sequana, above n 138, at [266].
208 ClientEarth, above n 157, at [47].
209 See Chapter Two, at 30-31.
210 Schane, above n 202, at 167.
211 Watts, above n 56, at 182.
212 Legislation Design and Advisory Committee, above n 172, at [15].
213 At [15].
The cumulative effect of these issues makes director decision-making inherently more complex and onerous, and presents a risk that directors become ultimately accountable to no one.214 It contributes to a legal framework that shifts a director’s focus from acting in a company’s best interests to deciphering what it actually means to do so. On account of this, Australia chose not to implement a provision analogous to the Amendment as it would be “counterproductive” to do so in the absence of a concrete mandate providing “guidance as to how those interests are to be weighed, prioritised and reconciled”.215 The absence of guidance also creates opportunities for directors to exploit their power, by using the balancing act “intrinsic to the stakeholder system as camouflage for their self-interest”.216
In addition to the practical implications, ambiguous legalisation is counterproductive due to the significant compliance costs inflicted on companies when endeavouring to comply.217 This was a concern expressed by the Legislation Design and Advisory Committee (LDAC) in relation to the Amendment.218 Given the wide range, scope and size of businesses operating in New Zealand, it would be impossible for guidance and regulatory oversight to mitigate ambiguity and ensure effective and consistent implementation of the Amendment. In the absence of such guidance, the compliance costs borne by individual companies increase.
The understanding and interpretation of ambiguous law requires specialised knowledge; empirical evidence suggests professional advice is associated with the greatest reduction in the difficulty of complying with directors’ duties.219 Therefore, when ambiguous legislation, such as the Amendment, is introduced, companies are compelled to consult with practitioners to ensure compliance.220 Given a corporate lawyer can cost over $600 an hour in New Zealand, this represents significant financial cost.221 These costs are not isolated, as allocative
214 Watts, above n 56, at 182; and see generally Francis Dawson “Acting in the Best Interests of the Company – For Whom are Directors ‘Trustees’?” (1984) 11 NZULR 68.
215 Goodman and Mohammed, above n 165.
216 Watts, above n 56, at 183.
217 Legislation Design and Advisory Committee, above n 172, at [5]-[5.1].
218 At [5]-[5.1].
219 Phil Lewis, Alice Richardson and Michael Corliss “Compliance Costs of Regulation for Small Business” (2014) 9 Victoria University Journal of Law and Governance 1 at 10.
220 At 2.
221 Lilly Falcon “How Much Does a NZ Business Lawyer Cost?” (23 March 2021) LegalVision
inefficiency arises when directors are forced to behave differently to ensure compliance; resources are diverted when they otherwise would not be, and operational challenges ensue.222
In passing such ambiguous legislation, Parliament has directly contributed to the mounting costs borne by companies in New Zealand.
The CA governs and regulates all registered companies in New Zealand. Consequently, large multinational corporations down to the local convenience store follow the same set of rules. This universality creates broad challenges for small businesses; whilst an NZX-listed company would have the ability to resource a large legal and compliance team to interpret and implement regulatory changes, the local convenience store may not.223 As such, it is significantly more difficult and burdensome for small businesses to fully understand and respond to regulatory changes; put simply, the Amendment places additional and unnecessary administrative and financial burdens on small businesses, harming both profitability and viability. It stifles entrepreneurial energy.
3.1 Increased Liability
The introduction of new legislation will invariably raise the likelihood of legal challenge, though the exact degree of this risk may be difficult to quantify.224 The Amendment, both in its ambiguity and extended scope, enhances this likelihood by demanding a more nuanced and subjective balancing act from directors. Considering a multitude of interests introduces additional complexity to the decision-making process, amplifying the potential for perceived or actual failures to consider all pertinent interests. Consequently, the practical application of the Amendment could inadvertently lead to an increase in legal claims contestable in court; there is no “obvious stopping point” to the potential liability created.225 This section of Chapter Three will discuss some of the many consequences that stem from increased liability.
222 See generally Lewis, Richardson and Corliss, above n 219.
223 At 7.
224 Ministry of Business, Innovation and Employment, above n 34, at [72].
225 Watts, above n 56, at 182.
Directors face personal liability for numerous reasons; it is a necessary component of corporate governance underpinning the assurance of integrity and functionality of corporate structure.226 The knowledge a director could face personal repercussions for their actions and decisions prompts a greater degree of diligence and trust in the execution of duties. It also provides valuable protection for shareholders who are afforded redress when directors have not acted as they should. However, a balance must be struck, as excessive liability for directors is counterproductive. It has been shown that increasing the potential for personal liability makes directors reluctant to serve on boards:227
Personal liability deters individuals from serving on corporate boards and we find stronger deterrence among firms that have greater litigation and regulatory risk and higher monitoring costs.
Directors regularly make decisions with significant implications. If personal liability for such decisions is too significant, particularly in light of modest director fees in New Zealand compared to similar jurisdictions,228 capable professionals (whose skills are most desired) become discouraged from accepting directorships.229 The increased liability does not deliver increased reward; simply, average New Zealand director fees do not sufficiently compensate for the level of liability carried.230 This strains the talent pool and ultimately lowers the standard of corporate governance. Greater liability also leads to higher turnover rates in quality directors who resign over reputational concerns.231
226 Jill Solomon Corporate Governance and Accountability (4th Edition, Wiley, 2013) at 88-116.
227 S Lakshmi Naaraayanan and Kasper Meisner Nielsen “Does personal liability deter individuals from serving as independent directors? Kasper Meisner Nielsen” (2021) 140 J Finance Econ 621 at 642; and J Richard Harrison and Marilyn R Kaplan “Defusing the Director Liability Crisis: The Strategic Management of Legal Threats” (1993) 4 Organization Science 412 at 416.
228 Tao Lin “NZ directors’ fees unfair compared with international standards: IOD” (14 August 2016) Stuff
229 Harrison and Kaplan, above n 227, at 422.
230 See median remuneration Stimulus “Independent director remuneration – how much should you pay?” (1 February 2023) <www.stimulusnz.com>.
231 See generally Eugene F Fama and Michael C Jenson “Separation of Ownership and Control” (1983) 26 J Law Econ 301.
The heightened risk of liability may also lead to overly cautious behaviour, including a shift in focus towards strict legal compliance thwarting innovative, value-adding endeavours. Fear of legal repercussions can disincentivise ‘healthy’ risk-taking, which can be detrimental to a business’s bottom line by stifling bold decision-making and discouraging directors from challenging management to pursue value enhancing opportunities.232 Instead, directors default to conservative decisions focusing on legal compliance rather than resilience and strategic growth. This hinders the overall performance of a business.
A related concern is the effect of increased liability on Directors and Officers (D&O) insurance. D&O insurance protects directors, officers and management personnel from legal claims associated with their professional roles.233 The New Zealand Institute of Directors (IOD) states the need for cover in New Zealand is “critical” with increasing risk (liability) for directors, and as of 2022, 89.5 per cent of organisations in New Zealand provide directors with D&O insurance.234
The D&O insurance market has faced significant volatility and disruption, with premiums notably increasing in recent years. Premium pricing is highly contingent on the liability faced by directors; as director liability increases, so does the probability an insurer will need to pay out a claim, leading to higher premiums to offset this risk. The increase in personal liability claims against New Zealand directors, in part because of regulation introduced through the Financial Markets Conduct Act 2013, has made D&O coverage increasingly challenging to obtain, prohibitively expensive and often subject to numerous carve-outs.
The IOD issued a report discussing how premium pricing is significantly impacted by movements in ESG, with the Amendment currently “dominating” concern.235 Classifying the Amendment-related risk as “real”, it suggests “directors and officers of companies of all sizes face a greater variety of exposures to liability under statute” as parties have become
232 Harrison and Kaplan, above n 227, at 422.
233 Crombie Lockwood “Liability insurance” <www.crombielockwood.co.nz>.
234 Institute of Directors New Zealand D&O insurance – hitting the reset button (Wellington, 2023) at 2.
235 At 7.
increasingly willing to hold boards accountable for alleged ESG misconduct.236 Legal ambiguity further complicates premium pricing, as unclear directives complicate risk management processes and elevate the risk of breaches.
Increasing premiums compound the issues discussed, leading to higher operational costs for companies and affecting their ability to attract and retain employee talent. As premium costs become more prohibitive or inaccessible, companies opting for lower coverage make their positions less attractive.
Frivolous litigation is the practice of bringing a legal challenge despite a lack of legal precedent, facts or merit.237 They are often brought to harass, annoy and embarrass defendants, or elicit settlement payments.238 Frivolous claims burden courts, divert judicial resources and create longer wait times for litigants.239 This is especially relevant in the current environment where the judiciary is struggling with a backlog of cases after the COVID-19 pandemic.240 By increasing the liability of directors, the Amendment will create opportunity for frivolous litigation; both shareholders and creditors have an increased arsenal to bring challenges against directors.
Directors subjected to lawsuits bear substantial burdens beyond immediate financial liability. While direct monetary costs, such as legal fees, are explicit, directors also face indirect challenges. These include reputational harm and the necessity to divert resources, such as time and attention, away from core responsibilities.241Although D&O insurance may mitigate some of the financial expense, coverage is not guaranteed to extend to the wrongdoing alleged. Litigation also brings significant psychological strain and harm.242
236 Institute of Directors, above n 234, at 16.
237 The Babcock Law Firm “Frivolous Lawsuits: What Are They and How Do They Affect You?”
238 Wesley A Cann Jr “Frivolous Lawsuits - the Lawyer’s Duty to Say No” (1981) 52 U Colo L Rev 367 at 386.
239 The Babcock Law Firm, above n 237.
240 Jimmy Ellingham “Justice system bogged down in ‘delays of two to three years’ for trials” (10 August 2023) RNZ <www.rnz.co.nz>.
241 John R Allison “Five Ways to Keep Disputes Out of Court” [1990] Harvard Business Review.
242 See generally Strasburger LH “The litigant-patient: mental health consequences of civil litigation” (1999) 27 JAAPL 203.
As aforementioned, the vehicle for shareholder challenges is derivative action under s 165 of the CA.243 A plaintiff must have an ‘arguable case’ for the court to grant leave,244 involving an analysis of whether a prudent business person in the conduct of their own affairs would pursue the claim.245 This is not an onerous threshold to satisfy, as per MacFarlane v Barlow,246 and thus the Amendment improves the already healthy likelihood of a (shareholder) plaintiff to be granted leave.
The CA provides additional redress methods to creditors. The pressurised, and often desperate, nature of creditors wanting to recover funds on insolvency may make insolvency situations more prone to frivolous litigation. Section 301 of the CA provides a mechanism for creditors to bring claims against directors alleging breach of duties in liquidation:247
If a director or former director ... has been guilty of ... breach of duty ... in relation to the company, the court may, on the application of the liquidator, or any creditor or shareholder, inquire into the conduct of the director or former director.
Section 301 creates personal liability of directors, allowing creditors a means of redress if directors act negligently or in violation of their duties.248 A similar mechanism developed through common law in Nicholson v Permakraft.249 When a company approaches insolvency, the company’s interests are equated to those of its creditors. Consequently, the duties owed to a solvent company transition to the creditors upon insolvency, enabling creditors to make claims.250
In such situations, the merit of a potential plaintiff’s case is often not the primary motivation for pursuing legal action. This is highlighted by the ‘rational actors’ model. Under this model, litigants, in this case shareholders and creditors, pursue claims to maximise “potential value” arising from the situation, leveraging information asymmetries and the threat of legal costs to
243 See Chapter One at 10.
244 He v Chen [2014] NZCA 153, (2014) 11 NZCLC 98-027 at [38].
245 Vrij v Boyle [1995] 3 NZLR 763, (1995) 6 TCLR 621 (HC) at 623.
246 MacFarlane v Barlow (1997) 8 NZCLC 261, 470 (HC).
247 CA, s 301.
248 CA, s 301; and Mainzeal, above n 91, at [163].
249 See Chapter One at 20-21; and Nicholson v Permakraft (NZ) Ltd, above n 84.
250 Mainzeal, above n 91, at [196] and [142]-[143]; and Nicholson v Permakraft (NZ) Ltd, above n 84.
elicit settlement.251 Such a model is plausible as a defendant’s decisions, in this case a director’s, are often derived from an evaluation of costs, which can be imperfect, rather than an objective assessment of the merits of the case.252
Given the inherent repercussions, both financial and reputational, borne by a defendant responding to litigation, empirical evidence suggests directors have a psychological inclination to settle;253 settlement is preferred as a hedge against the potential for personal loss.254 When a claim has seldom been litigated, which is likely under the Amendment given the diverse stakeholders associated with any business, this inclination strengthens as novelty increases risk aversion.255 Settlement is also common when the cost to respond to a claim equals the settlement amount.256
As such, the decision to bring claims against directors doesn’t necessarily depend on the claim’s merit, but on the availability of a legal pathway. By expanding the scope of directors’ liability, the Amendment broadens these pathways and opens the door to a widened array of claims. Consequently, the ability for a creditor or shareholder to file frivolous suits increases, and by implication so does the likelihood that a creditor will opportunistically leverage the Amendment, especially under financial duress, to recover monies owed. Such situations are difficult to avoid: “a man with a poor case is as much entitled to have it judicially determined by legal process as the man with a good case”.257 Legal systems globally have been grappling with this issue for some time.258 Given the limited options for mitigating this issue without imposing significant sanctions, thereby risking potential injustices and restricting access to justice, the most effective method is to eliminate the mechanism, in this case the Amendment, that gives rise to such a situation in the first instance.
251 Chris Guthrie “Framing Frivolous Litigation: A Psychological Theory” (2000) 67 U Chi L Rev 163 at 165.
252 At 165.
253 At 168.
254 At 168.
255 At 172-175.
256 At 172.
257 Edmund R Manwell “The Vexatious Litigant” (1966) 54 Calif L Rev 1769 at 1769.
258 Guthrie, above n 251, at 163-164.
Strategic litigation is a strategy that employs the judiciary to effect societal change. Unlike traditional litigation, which focuses directly on the parties involved in the lawsuit, strategic litigation aims to influence the opinions held by others to the benefit of something bigger than the parties.259 Given the public discourse strategic litigation tends to create, the ability for it to serve its purpose is not necessarily constrained by whether a court rules in the plaintiff’s favour. It can be a powerful tool to achieve social justice, and non-governmental organisations and advocacy groups often use it to address systematic issues, a notable example being Sarah Thompson v Minister for Climate Change Issues.260 The plaintiff in this case sued the New Zealand Government alleging a breach of duties against the Minister for not setting ambitious enough climate change goals.261 Ultimately, the High Court dismissed the claim.262 However, the litigation drew significant public attention to the issues of climate change and the Government’s related actions, spurring public discourse and exerting social pressure on the Government.263
In the context of corporate governance, strategic litigation is a mechanism by which shareholders use lawsuits to influence and change the actions or decisions made by directors, enforce shareholder rights or advance the interests of particular parties. As stated by the LDAC, it has gained global popularity as a form of shareholder activism and mechanism to ensure accountability;264 strategic litigation is noted as “one of the most distinctive external governance mechanisms”.265 Much like Sarah Thompson v Minister for Climate Change Issues, the objective of such litigation goes beyond any immediate monetary gain that may result. Strategic litigation uses the law not necessarily to right a wrong or address an issue but to impose political and social opinions.
259 European Centre for Constitutional and Human Rights “Strategic litigation” <www.ecchr.eu>.
260 Thomson v Minister for Climate Change Issues [2017] NZHC 733, [2018] NZLR 160.
261 At [1].
262 At [180].
263 See Sarah Thomson “I took the climate change minister to court and won – kind of. Now I’m looking at you, James Shaw” (4 November 2017) The Spinoff <www.thespinoff.co.nz>; and Ged Cann “Government lawyers question court’s ability to rule on climate change case” (27 June 2017) Stuff <www.stuff.co.nz>.
264 Legislation Design and Advisory Committee, above n 172, at [27].
265 Sirimon Treepongkaruna, Khine Kyaw and Pornsit Jiraporn “Shareholder litigation rights and ESG controversies: A quasi-natural experiment” (2022) 84 IRFA 1 at 1.
The Amendment will make the opportunities for strategic litigation more pronounced by virtue of expanding the scope of directors’ liability. Instead of using other means to settle differences, shareholders will be able to allege a wider array of claims and promote specific agendas through litigation; an example of this being ClientEarth, where the court stated if the primary purpose of alleging a breach of directors duties is an “ulterior motive in the form of advancing [the party’s] own policy agenda” then the claim is not in good faith.266 In this instance, the Court suggested the claimant’s motivation was driven by something other than a balanced consideration as to how best to enforce the multifarious factors directors are bound to consider when assessing the best interests of a company.267
This relates to how strategic litigation must not be abused, but only used for the purposes of accountability. It is in bad faith if used to gain strategic or competitive advantage. Given it is not required that all shareholders be privy to a lawsuit, shareholders may pursue litigation to advance their personal interests or agenda at the expense of other shareholders, including those disinterested.268 This can lead to financial loss as the public discourse associated with strategic litigation can be detrimental to a company’s stock price; ESG-related ‘scandals’ decreased the value of US firms in the S&P 500 by USD 534 billion between 2014 and 2019.269
These losses are not necessarily all attributed to strategic litigation, however activist shareholders seeking litigation as a mechanism to expose and subsequently change the views of companies is a key factor. It has been shown that a reduction in shareholder litigation rights results in significantly fewer ESG controversies being aired in the open.270 Instead, such controversies are resolved ‘behind closed doors’ by prudent directors.
Whilst strategic litigation has a place in corporate governance, the potential for its misuse underscores the importance of a balanced approach. Such litigation should only be used as an accountability tool in circumstances where alternative mechanisms are ineffective or insufficient. The Amendment does not address safeguards to prevent the abuse and exploitation of strategic litigation, yet expands the situations where litigation could be employed. As a
266 ClientEarth, above n 157, at [64] assuming the claim would not have been brought but for that purpose.
267 At [65].
268 An example is ClientEarth, above n 157, where the support for their claim related to merely ~0.17% of Shell’s shares.
269 Treepongkaruna, Kyaw and Jiraporn, above n 265, at 3.
270 At 2.
consequence, it will inadvertently contribute to an environment that encourages litigation not for accountability, but for strategic advantage.
3.2 Conclusion
This chapter has assessed the plethora of unintended and adverse implications introduced by the Amendment. These implications, which significantly impact corporate governance in New Zealand, highlight the risks associated with such legislative change. By attempting to encourage stakeholder theory and extinguish the norm of shareholder primacy, the Amendment introduces more complexities than clarity. This places significant doubt on its utility, and prompts a critical inquiry: is legislative intervention the most effective means to influence director behaviour? This dissertation must thus explore alternative methods, beyond legislative measures, that achieve the desired shift in director focus without inducing such implications.
CHAPTER FOUR: Alternatives to the Amendment
There are non-legislative influences that increasingly compel directors to consider ESG. In a survey undertaken in 2012 of the then 130 listed companies on the NZX, 91 of these companies had documented evidence of considering the interests of stakeholders.271 This was before ESG had the global standing it does now. The explanation for this finding is the competitive advantage gained when utilising ESG:272 “there is little doubt that concern for a business’ stakeholders ... can be a recipe for success and in some cases is essential for survival”.273 This chapter will assess the pre-existing factors incentivising directors to prioritise ESG and stakeholders more effectively and without the detriment associated with the Amendment.
The CA applies to every registered company, and whilst all companies interact with their respective markets, market incentives are particularly relevant to those operating within capital markets. With more at stake, larger, listed corporations tend to be more proactive at reacting to market forces.274 The comparatively large impact of such corporations makes it likely they were the intended ‘target’ of the Amendment. In addition, it is difficult to envision the creditors and shareholders of small businesses (such as the local convenience store) taking legal action against its directors; as aforementioned, such companies tend to have shareholder directors and are funded by a limited number of shareholders and simple bank loans. Large corporations have also been the intended ‘target’ of other ESG-related legislative changes, such as the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021, discussed in this chapter.
4.0 Market Incentives to Promote Stakeholders
In contemporary corporate environments, the efficacy of a company’s operations is intrinsically linked to its interaction dynamic with the market.275 Directors must ensure they are equipped with a strong understanding of market nuances and endeavour to anticipate these
271 Vasudev, above n 53, at 168 and 172.
272 Hung, above n 106, at 3.
273 Watts, above n 56, at 180.
274 See generally L Araújo and Rogério Gava Proactive Companies: How to Anticipate Market Changes
(Palgrave Macmillan, 2012).
275 See generally S Sivaramakrishnan and others “Critical Success Factors and Outcomes of Market Knowledge Management: A Conceptual Model and Empirical Evidence” (2010) 6 IJKM 1.
interactions to formulate strategies accordingly. For regulatory bodies, grasping this intricate and company-specific dynamic is difficult; whilst legislative frameworks delineate the boundaries of corporate action, market trends and consumer behaviour present incentives that shape corporate strategy. The market typically operates as a more immediate determinant of corporate conduct compared to legislation.
Within this outlook, the significance of stakeholder interests, as quantified by ESG ratings, has become increasingly apparent in 2023; the ascendant influence of ESG ratings in capital markets signifies a pivotal role in corporate evaluations, with the advantages of stakeholder consideration often stemming from the receipt of a high ESG rating.276 Broadly speaking, ESG ratings measure a company’s sustainability and ethical performance,277 but each rating agency may use a range of metrics.278 A strong relative ESG rating implies a company manages its EGS risks to a greater level than its peers (or sample group), while a low relative score indicates high unmanaged ESG risk exposure.279
The identification of ESG metrics and the subsequent compliance of those metrics has become an important priority in the minds of capital providers. It matters to investors if an investee company is making positive contributions to society and the environment.280 In 2021, a PwC survey found that from a sample of 325 global investors, 80 per cent viewed ESG as an important factor in their investment decision-making, and 50 per cent were willing to divest from investments that failed to take (what they believed was) sufficient action on ESG.281 This is largely due to the advantages gained by a high ESG rating. This chapter will discuss three of these advantages, building on the benefits of stakeholder theory discussed in Chapter One: market outperformance, lower idiosyncratic risk and lower cost of debt financing.
276 Deloitte Quantifying ESG: How ESG Implementation Impacts Key Valuation Metrics (2023) at 3.
277 Adam Hayes “How to Tell If a Company Has High ESG Scores” (27 July 2023) Investopedia
278 Florian Berg, Julian F Kölbel and Roberto Rigobon “Aggregate Confusion: The Divergence of ESG Ratings” (2022) 26 Rev Finance 1315 at 1326-1327.
279 Jason Krychiw “ESG Scores: The Good, the Bad, & Why they Matter” Conservice ESG
280 Deloitte, above n 276, at 3.
281 James Chalmers, Emma Cox and Nadja Picard The economic realities of ESG (PwC, 2021) at 3.
Sustainable funds, commonly structured as mutual or exchange-traded funds, invest solely in companies with strong ESG ratings. Consequently, they have gained global popularity with ESG-orientated investors. This popularity represents market trends and the intention of investors to align personal beliefs and values with investments;282 inflows into sustainable funds grew from USD 5 billion in 2018 to almost USD 70 billion by 2021.283 This is an annual growth rate of over 140 per cent, and reflects the broader societal shift towards ethical stewardship and long-term sustainability.284
Empirical data lends weight to the financial merits of an ESG-based investment strategy; a recent meta-analysis found the majority of sustainable funds outperform the broader market year-on-year.285 The analysis reviewed over 1,000 studies published from 2015 to 2020, and illustrated a positive correlation between an ESG focus and strong financial performance in 58 per cent of cases.286 With a focus on operational metrics, including return on equity, return on assets and stock price,287 the meta-analysis found that the outperformance of sustainable funds is most commonly explained through stakeholder theory.288
Improved financial performance due to ESG is more prominent over a longer time period,289 with the likelihood of outperformance increasing to 76 per cent with a long-term focus.290 Other findings, such as tangible financial performance improvements when managing for a low carbon future and a strong correlation between sustainability and improved innovation, were also evident.291 What is perhaps more significant is that strong ESG practices offer companies downside protection and better financial performance during poor economic cycles,292
282 Brian Baker CFA “ESG investing statistics 2023” (31 January 2023) Bankrate <www.bankrate.com>; and E Napoletano “Environmental, Social And Governance: What Is ESG Investing?” (22 June 2023) Forbes
283 Lucy Pérez and others Does ESG really matter - and why (McKinsey, 2022) at 1.
284 At 1-2.
285 Tensie Whelan and others ESG And Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020 (Rockefeller Asset Management, 2021) at 5.
286 At 5.
287 At 5.
288 At 5.
289 At 7.
290 At 7.
291 At 8-9.
292 At 8.
particularly during periods of market turbulence.293 By analysing ~2,500 US equity and bond based funds in 2020, when COVID-19 caused a substantial decline in the global market, a recession and a subsequent bullish phase,294 empirical evidence suggests sustainable funds “weathered” the difficult period better than non-ESG counterparts.295 Such funds outperformed by a median total of 3.9 per cent.296
The performance disparity between ESG and non-ESG focused companies has practical implications for strategic risk management and portfolio diversification, especially considering sustainable funds have decreased downside deviation of 3.1 per cent.297 These insights inform investment strategies by underscoring the potential of ESG to contribute to financial performance and risk mitigation; they represent a tangible illustration of how adherence to ESG principles aligns with strong financial performance, whilst strengthening the interplay between social responsibility and financial pragmatism.
Idiosyncratic risk, often referred to as unsystematic risk, is specific to an individual asset or a group of assets.298 Unlike risk stemming from broader macroeconomic shifts (systematic risk), idiosyncratic risk arises from microeconomic factors unique to a particular company, including keyman, regulatory, execution and financial risk. Empirical research establishes a statistically significant inverse correlation between ESG ratings and idiosyncratic risk, meaning companies with credible ESG ratings tend to experience a reduction in such risk. The stronger the rating, the stronger the effect.299
293 Pérez and others, above n 283, at 7.
294 Anna-Louise Jackson and Benjamin Curry “2020 Stock Market in Review: A Year That Defied Expectations” (14 December 2020) Forbes <www.forbes.com>.
295 Morgan Stanley Institute for Sustainable Investing Sustainable Reality:2020 Update (Morgan Stanley, 2020) at 4.
296 At 1 and 4.
297 Morgan Stanley “Sustainable Funds Outperform Peers in 2020 During Coronavirus”
298 James Chen “Idiosyncratic Risk: Definition, Types, Examples, Ways To Minimize” (12 May 2022) Investopedia <www.investopedia.com>.
299 Matthias Horn The Influence of ESG Ratings on Idiosyncratic Stock Risk: The Unrated, the Good, the Bad, and the Sinners (Germany, 2023) at 1 and 22.
These findings are significant, as the majority of an asset’s total risk variation over time can be attributed to its idiosyncratic risk.300 Consequently, assets with lower idiosyncratic risk tend to yield higher returns, making such assets more attractive to investors.301 These higher returns can be attributed to a company’s increased resilience to unexpected macroeconomic events, which is particularly relevant for companies operating in volatile or competitive sectors.302 A reduction in risk also increases investor confidence, which leads to more attractive financing arrangements. Empirical data shows the cost of capital for ESG-rated firms is, on average, 1.2 per cent lower than that of unrated firms.303 To contextualise this, for a corporate project costing$100 million, a 1.2 per cent reduction equates to annual savings of $1.2 million.
The empirical link between ESG ratings and reduced idiosyncratic risk emphasises the market’s embedded championing of ESG, reinforcing the imperative for companies to integrate ESG considerations into strategic blueprints.
Companies with low ESG ratings can struggle to access debt facilities, as “debt providers are increasingly citing ESG criteria as reasons to join deals or not”.304 A report by Deloitte in 2023 observed a negative relationship between the ESG rating of a firm and its cost of debt, which indicates that the stronger the ESG rating, the lower the cost of debt.305 This has practical implications for companies, especially those with high leverage that rely on the availability of debt for financial viability. In New Zealand, debt (from trading banks and institutional debt providers) is harder to secure in ‘dirty’ industries, such as oil and gas, because lenders have become sceptical that such loans comply with their stated ESG metrics.306
300 Mostafa Monzur Hasan and Ahsan Habib “Firm life cycle and idiosyncratic volatility” (2017) 50 IRFA 164 at 1; and John Y Campbell and others “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk” (2002) 56 AFA 1 at 1.
301 Horn, above n 299, at 2.
302 At 4-6.
303 Woei Chyuan Wong and others “Does ESG certification add firm value?” (2021) 39 Finance Res Lett 1 at 5.
304 Prudence Ho “Leveraged loan investors push private equity firms on ESG” [2019] Thomson Reuters.
305 Deloitte, above n 276, at 5.
306 See for example ANZ “Environment” <www.anz.co.nz>; and Westpac “Climate Action”
This is highlighted through the increased implementation of sustainability-linked loans (SLLs), or loans contractually linked to a company’s ESG performance; under such agreements, lower interest rates are allocated to companies with stronger ESG ratings, and/or higher interest rates to companies with poor ESG ratings.307 As banks have access to proprietary information relating to borrowers, they are well positioned to monitor sustainability-linked key performance indicators (KPIs), and build the delivery of such KPIs into the cost of debt to ensure or encourage compliance.308
Evidence suggests that lenders have varied motivations for issuing SLLs. Some aim to limit potential reputational damage associated with lending to borrowers with poor sustainability, whereas others genuinely seek to incentivise borrowers to limit ESG risks.309 In a New Zealand context, an SLL is currently being offered by BNZ in the form of an agribusiness loan, with interest rates determined by ESG KPI compliance.310 Whilst BNZ’s stated aim is to assist businesses to “increase your positive and reduce your negative environmental and social impact”, it is apparent BNZ will gain brand equity through the provision of loans structured in this way; it receives positive marketing and public relations sentiment and provides the means to satisfy its own ESG obligations. As such, these concessions offered by lenders need to be material to maximise impact, otherwise they can be seen as a ‘marketing gimmick’ or ‘greenwashing’ to build brand equity. However, companies frequently rely on debt financing, meaning financing agreements contingent on ESG nevertheless encourage sustainable decision-making.311 Empirical evidence suggests “actual changes in borrowers’ sustainability practices [are] associated with the issuance of SLLs”.312
Such agreements offered by BNZ follow the international trend of debt financing, and SLL obligations are likely to feature in future New Zealand financing agreements. Recently, Westpac New Zealand provided an NZD 70 million SLL facility to the Warehouse Group, structured in a way that grants the latter discounted rates if it delivered upon five sustainability
307 Richard Carrizosa and Al (Aloke) Ghosh Sustainability-Linked Loan Contracting (Social Science Research Network, 2023) at 3.
308 At 1.
309 At 5 and 24.
310 BNZ “Sustainability Linked Loans” <www.bnz.co.nz>.
311 See generally Carrizosa and Ghosh, above n 307. Over 80 per cent of New Zealand companies are funded, to some extent, by debt.
312 Kai Du, Jarrad Harford, and David (Dongheon) Shinat Who Benefits from Sustainability-linked Loans?
(Social Science Research Network, 2022) at 24.
KPIs.313 As similar examples become more prevalent, directors must learn to expect such KPIs in debt financing.314
The less compliant a company is with ESG, the harder it will become to secure debt financing on competitive (price and non-price) terms. Stakeholder considerations have thus become inherently more important for businesses, such that ignoring them can jeopardise the ability to obtain capital.
4.1 Consumers Voting with their Feet
Legislation relating to the treatment of stakeholders already exists in New Zealand; for example, the Resource Management Act 1991, the Health and Safety at Work Act 2015 and the Employment Relations Act 2000.315 The convergence of these regimes, inter alia, ensures appropriate minimum consideration be given to certain stakeholders. However, consumers in the market also play a key, if not more powerful, role in ensuring such considerations when ‘voting with their feet’. This phrase describes the power of consumers to choose where they spend their money, and in turn, exert pressure to influence corporate decision-making.316 It is a key accountability measure;317 companies rely on consumers buying or using their products to generate revenue, and directors must be adept at responding and implementing change if consumers become unhappy. Compared to regulation, consumers voting with their feet presents a timelier and more direct signal to companies.318
The influence of consumers is highlighted by the challenges Amazon experienced during the COVID-19 pandemic. Amazon failed to provide basic needs such as personal protective
313 Westpac NZ “The Warehouse Group and Westpac NZ sign $70m Sustainability-Linked Loan with broad innovative sustainability targets” (8 November 2021) <www.westpac.co.nz>.
314 See for example Whanganui Chronicle “Ātihau-Whanganui Incorporation receives BNZ’s first Māori Agribusiness Sustainability Linked Loan” (1 December 2022) NZ Herald <www.nzherald.co.nz>; Nikki Mandow “Business growth and the role of green finance” (22 December 2022) Newsroom
<www.newsroom.co.nz>; and SGB Media “KMD Closes NZ$310 Million Debt Refinancing Tied To Sustainability” (19 May 2023) <www.sgbonline.com>.
315 Legislation Design and Advisory Committee, above n 172, at [25].
316 Cambridge Dictionary “Vote with your feet” <www.dictionary.cambridge.org>.
317 Bud Hennekes “Your customers are voting with their feet — are you paying attention to the results?” (13 November 2018) Dor Technologies <www.getdor.com>.
318 See generally Alan Spalter “Customers Are Voting with their Feet” (26 August 2019) The Robin Report
equipment and cleaning facilities to protect employees from COVID-19 infection, which led to significant criticism from consumers, employees and the general public over labour practices.319 This criticism fuelled employee and consumer protests, walkouts and boycotts,320 inflicting detriment to Amazon and ultimately forcing the implementation of improved working conditions. The sentiments of society and consumer buying patterns became overwhelming, and Amazon simply had to act.
Another example is Hennes & Mauritz (H&M). H&M is a Swedish-based global fashion company that gained notoriety as a leader in ‘fast fashion’,321 a practice that ensures lowest possible cost production but creates significant environmental and social harm.322 Discourse relating to fast fashion gained global attention in the 2010s, and organisations such as Greenpeace began criticising H&M for its use of unsustainable materials. The culmination of this was ‘The True Cost’, a documentary that exposed the environmental and societal impacts of fast fashion, targeting H&M and similar companies whilst urging them to change.323 In response, consumers boycotted H&M and refused to buy their products. H&M had little choice but to implement change, and it overhauled its supply chain to create several new sustainability initiatives.324
The pressure of consumers can be limited by the market in which they operate. In small markets with limited consumer choice, such as New Zealand, it is more difficult for consumers to vote with their feet. For example, the supermarket industry, an effective duopoly, is almost completely controlled by Woolworths and Foodstuffs.325 If a consumer becomes unhappy with a particular operator, their ability to influence decision-making is limited by the lack of
319 See for example Irina Ivanova “Amazon workers worry about catching coronavirus on the job” (25 March 2020) CBS News <www.cbsnews.com>; and Megan Rose Dickey “Amazon faces lawsuit alleging failure to provide PPE to workers during pandemic” (13 November 2020) Tech Crunch <www.techcrunch.com>.
320 The Guardian “Amazon workers walk out over lack of protective gear amid coronavirus” (31 March 2021)
<www.theguardian.com>; and Josh Dzieza “Amazon warehouse workers walk out in rising tide of COVID-19 protests” (31 March 2020) The Verge <www.theverge.com>.
321 See for example Anusha Bradley “Fashion victims: the true cost of H&M clothing” (26 September 2016) RNZ <www.rnz.co.nz>; and Natasha Boyd and Daniella Strazzeri “H&M: Moving Away from Fast Fashion” (29 May 2022) Medium <www.medium.com>.
322 See generally Vertica Bhardwaj and Ann Fairhurst “Fast fashion: response to changes in the fashion industry” (2010) 20 The International Review of Retail Distribution and Consumer Research 165.
323 IMDB “The True Cost” <www.imdb.com>.
324 H&M Foundation “Accelerating change” <www.hmfoundation.com>.
325 Sarah Robson “Shopping for change: Busting the supermarket duopoly” (18 July 2022) RNZ
competition, unlike for H&M and Amazon which operate in highly competitive markets. In such markets, companies are incentivised to exert more effort and focus on ensuring they provide customers the soft benefits that drive purchase decisions. If not, there are other companies used by consumers to fill their niche. However, assuming no monopolistic behaviour, which is regulated by the Commerce Commission, it is generally (almost) always possible for New Zealand consumers to vote with their feet, applying pressure and influencing the decisions of companies.
Social pressure exerts substantial influence over catalysing positive corporate decision-making, as illustrated by the actions of Amazon and H&M. As modern consumers have become more attuned to the cultural, ethical and environmental impacts of businesses, their tendency to take action upon ESG dissatisfaction has increased. By implication, directors are compelled to maintain high ESG standards, as actions taken by consumers cause significant detriment and force change regardless. The advent of modern media has amplified this dynamic, with platforms such as Facebook and Twitter serving as a sounding board for public opinion. This allows consumers to voice concerns on a global scale, leaving directors little choice but to be proactive and engage with consumer sentiments. Such sentiments wield considerable influence: Amazon and H&M changed at the command of consumers, not regulation.
4.2 Non-legislative Instruments
While all New Zealand companies are regulated by the CA, there are several non-legislative instruments that provide a framework for disseminating good governance practices in New Zealand.326 The Financial Markets Authority’s ‘Corporate Governance Handbook’, which encourages directors to regard stakeholder interests,327 is one of these instruments. However, the ‘NZX Corporate Governance Code’ (the Code) is the instrument that provides the “primary guidance on corporate governance practices” for NZX-listed companies.328 Although most New Zealand companies are small-to-medium enterprises that are not required to comply with
326 Watson, above n 13, at [16.14.1].
327 Financial Markets Authority Corporate governance in New Zealand: Principles and guidelines (2018) at 26,
principle 8.
328 NZX NZX Corporate Governance Code (2023). See the Financial Markets Authority, above n 327, at 5 where it is stated that the Code is the primary instrument. The ‘Corporate Governance Handbook’ does, however, still remain potent in the regulatory framework.
the Code, the larger (listed) companies which have the greatest impact on society do.329 The guidelines are not legally enforceable, but breaching them will generally lead to sanctions.330
The principles of the Code promote good corporate governance, recognising that directors should provide long-term value.331 Although the Code places shareholders as priority interest holders,332 it promotes stakeholder considerations as core to a company’s success. In an ESG guidance note pursuant to the Code, NZX refers to how global sustainable investments have reached an assets under management value of USD 35 trillion, or ~36 per cent of all professionally managed assets. This highlights that ESG related decision-making is something that, in 2023, is ‘just done’.333 The Code’s directives have potency in the minds of directors, as scholars accept the Code is a relevant and efficient means to influence director behaviour.334
A key aim (or recommendation) of the Code is to ensure issuers disclose ESG-related, or ‘non-financial’, information.335 NZX has a guidance note that provides a comprehensive guide to achieve successful non-financial disclosure, which has become a ‘normal practice’ for New Zealand companies.336 This is evident by the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021; provisions of this Act obligate financial institutions covered by the Financial Markets Conduct Act 2013 to initiate climate-related disclosures for the financial year which commenced in 2023.337 Such disclosures improve both the quality and the availability of firm-specific non-financial information, meaning investors can make better informed ESG investment decisions.338 Investors are thus inclined to avoid companies they would have previously considered, due to newly revealed ESG concerns or shortcomings. This dynamic builds on the Code’s championing of ESG, as by not allowing companies to conceal poor ESG practices, it exerts pressure on directors to make ESG-orientated decisions.
329 Watson, above n 13, at [16.14.1].
330 At [16.14.1].
331 NZX, above n 328, at 3.
332 Watson, above n 13, at [16.14.3].
333 NZX Guidance Note: NZX ESG Guidance (2023) at 6; and see Chapter Four at 48-49 where the ascendancy of sustainable funds is discussed.
334 Watson, above n 13, at [16.14.1].
335 NZX, above n 328, at 21 and 25.
336 NZX, above n 333.
337 Ministry of Business, Innovation and Employment “Mandatory climate-related disclosures”
338 See generally Philipp Krueger and others The Effects of Mandatory ESG Disclosure Around the World
(2021).
Non-legislative instruments, such as the Code, wield power: they influence the actions of directors and catalyse certain decision-making. With the growing emphasis and relevance of ESG, such instruments are increasingly citing and encouraging the importance of corporate sustainability. In the case of ESG disclosure, it has either become mandatory or heavily encouraged. These influences do not go unnoticed, rather, they increasingly compel directors to implement ESG-related decision-making into strategic risk management.
4.3 Conclusion
The clear benefits of a strong ESG culture underscore the importance of ESG in modern corporate governance. Directors who choose to ignore these benefits are fighting a losing battle and risk becoming unaligned with the evolving corporate landscape: ESG has become a “make- or-break consideration” for all directors.339 Rather than a concept pertaining solely to the betterment of individual stakeholders, ESG is inextricably linked to tangible corporate benefit.340 When a company’s success is reliant on its directors discerning and responding to market trends and consumer sentiments, overlooking the present corporate landscape so heavily favouring ESG is untenable. Within this perspective, the Amendment does not provide utility. In 2023, New Zealand directors are commanded to make ESG and stakeholder advancements by the imperatives of the market, consumer demand and non-legislative instruments. This is substantiated by empirical evidence,341 and holds far greater persuasion than of that wielded by the Amendment.
339 PwC “Companies failing to act on ESG issues risk losing investors, finds new PwC survey”
340 Langford, above n 154, at 522.
341 Vasudev, above n 53.
CONCLUSION
Not only does the Amendment lack utility,342 its intended purpose was (and is) symbolic.343 Using legislation for such a purpose, especially through the member’s bill process, is misjudged. This concluding chapter will contemplate this issue, before providing a conclusion on the arguments presented by this dissertation.
5.0 Inappropriateness of Symbolic Legislation
The term ‘symbolic legislation’ refers to legislation that is to a large extent legally ineffective but aims to serve political and social goals.344 Supporters of symbolic legislation believe it to be a useful tool to send messages, focus public attention and shape national conversation on issues.345 The Amendment fits the definition of symbolic legislation as it is designed not for a strictly legal purpose, but to promote social goals in the context of corporate governance. Peter Watts, when discussing congruous overseas legislation, describes the intention of legislation such as the Amendment as serving a symbolic purpose.346
Against the backdrop of the Amendment, symbolic legislation is inappropriate when, according to the Law Commission ‘Legislation Manual’, the purpose of legislation is to embody the rules of society:347
Legal rules and principles ... impose restraints and duties on individuals and groups. They also confer and protect rights, benefits and liberties. They are increasingly set out in legislation; that is, they are embodied in laws enacted by Parliament.
The Amendment was not intended to impose restraints and duties on individuals and groups, nor confer and protect rights, benefits and liberties, making it improper machinery. This is the position articulated by the Law Commission in 1989, stating “a Companies Act is not the appropriate vehicle for imposition of general social reforms such as ... the imposition of
342 See Chapters Two, Three and Four.
343 See Chapter One at 19.
344 Bart van Klink “Symbolic Legislation: An Essentially Political Concept” in Symbolic Legislation Theory and Developments in Biolaw (VU University Amsterdam, 2016) 19 at 19.
345 At 24-25.
346 Watts, above n 56, at 18.
347 Law Commission Legislation Manual Structure and Style (NZLC R35, 1996) at [1].
environmental goals upon companies.348 The LDAC agrees with the Law Commission,349 and their positions make it clear that the Amendment not only lacks utility,350 but that it is misaligned with the principles and objectives of legislation at large.
5.1 Inherent Weakness of a Member’s Bill
By definition, member’s bills will “affect public policy but are not part of the Government’s legislative programme”, and they can be introduced by MPs who are not Ministers351 after being picked from a lottery in an old biscuit tin.352 By virtue, member’s bills are not subject to the scrutiny of a comprehensive review or policy process under which government bills are placed. Policy, which leads to government bills, is developed by government departments within a framework consisting of the Cabinet Manual, the CabGuide and the LDAC Guidelines.353 This framework encourages consultation with affected and interested parties, and promotes awareness of pre-existing legal issues and accessible and coherent legislation.354
As a member’s bill prior to the Royal Assent, the Amendment failed to receive this pre-legislative scrutiny.355 By consequence, the Government was unable to contemplate issues raised by the Amendment, resolve potential points of conflict nor remove contradictions and impractical suggestions prior to its introduction.356 This induces lower quality of debate in Parliament and less informed scrutiny at the select committee stage.357 After such scrutiny was applied, and the Amendment failed to get endorsement by the Select Committee, LDAC and MBIE, the opinions of these parties, the ‘experts’, were seemingly deemed futile.
348 Law Commission, above n 15, at [19].
349 Legislation Design and Advisory Committee, above n 172, at [20].
350 See Chapters Two, Three and Four.
351 The New Zealand Parliament “Parliament Brief: The legislative process” (15 May 2020)
352 Phil Smith “Louisa & Louise: How to member’s bill” (1 August 2021) <www.rnz.co.nz>.
353 Department of the Prime Minister and Cabinet Cabinet Manual 2008 (Cabinet Office, Wellington, 2008); Department of the Prime Minister and Cabinet “CabGuide: Guide to Cabinet and Cabinet Committee Processes”
<cabguide.cabinetoffice.govt.nz>; and Legislation Design and Advisory Committee Legislation Guidelines
(2021).
354 Hamish McQueen “Parliamentary Business: A Critical Review of Parliament’s Role in New Zealand’s Law- Making Process” [2010] AukULawRw 2; (2010) 16 Auckland U L Rev 1 at 4.
355 At 4-5.
356 At 5.
357 At 4-5.
It is inappropriate to approach an Amendment to the CA, which significantly affects ~700,000 companies operating in New Zealand,358 in such an ad hoc way; reform should be implemented through specific, targeted legislation, only after a comprehensive review or policy process.359 A member’s bill is not the correct forum. Rather than well-meaning politicians, the catalyst should be key policy concerns and rationale.
5.2 Concluding Remarks
Shareholder primacy and stakeholder theory are competing paradigms. In New Zealand, the notions of shareholder primacy function as a social and economic understanding, rather than a legal directive; the CA does not promote them, however shareholder primacy has nevertheless emerged as a de facto legal norm “intrinsic” to New Zealand company law.360 This norm, which overshadows the conception of the company as a separate legal entity, is challenged by the Amendment; the Amendment attempts to extinguish the notions of shareholder primacy by promoting stakeholder theory. However, in doing so, it has made the statutory framework infinitely more ambiguous. Not only will it fail to catalyse the desired change, the Amendment introduces a plethora of unintended and adverse implications. These implications are a substantial risk to bear, particularly when there are more effective ways to achieve the desired end.
In the context of the Amendment, legislative intervention is not the correct way to influence director behaviour. Legislation should delineate the boundaries of corporate action, not direct strategic decision-making; this is best left to directors, who are compelled to use business judgement to discern market trends and consumer sentiments. In 2023, directors who choose to ignore ESG (and the stakeholder considerations it commands) risk becoming unaligned with the evolving corporate landscape. Rather than a concept pertaining solely to the betterment of individual stakeholders, ESG is inextricably linked to tangible corporate benefit.361 It follows, therefore, that a prudent director will not ignore ESG, as to do so ignores the benefit it creates.
358 New Zealand Companies Office “Latest company statistics” (7 August 2023)
<www.companiesoffice.govt.nz>.
359 Legislation Design and Advisory Committee, above n 172, at [20].
360 See Chapter Two at 18-19.
361 Langford, above n 154, at 522.
Attempting to symbolise change via the introduction of legislation is merely an ad-hoc remedy. Addressing core frameworks such as the CA with legislation necessitates more than mere symbolic gestures or political manoeuvres; it requires policy review, deliberation and foresight. The member’s bill process bypasses such scrutiny, and for a provision affecting ~700,000 registered companies, such a cursory approach is inappropriate. Rather, this dissertation highlights a need for comprehensive reform of the CA; not only to remove ambiguity and modernise provisions, but to definitively resolve that a company is a separate legal entity constituting an aggregation of capital, not a collection of shareholders.362 Over 150 years have passed since the first companies act created the concept of separate legal identity, yet the legal framework still struggles to position it within the legal and social landscape.
It must be unequivocal in such a reform that directors, when acting in a company’s best interests, are duty-bound to make decisions that maximise and sustain entity value. They are not required to act in the best interests of shareholders.363 However, the specific beneficiary of acting for the entity, whether it be shareholders or other stakeholders, is secondary as long as entity value is created.364 Emphasising a focus on furthering the interests of the entity extinguishes the legal norm of shareholder primacy by commanding a wider view of corporate benefit and trade-offs between stakeholders, going beyond the interests of shareholders. Given the now present link between corporate benefit and ESG, an entity focus necessitates stakeholder-orientated considerations to extract this benefit. This is due to the influence of market trends, consumers and non-legislative instruments. There is thus no benefit in risking a plethora of adverse implications on symbolic, ad hoc legislation that provides no utility.
362 See Chapter One at 17-18 for the definition of a company.
363 Although the interests of shareholders and the interests of the corporate entity can coincide when considering stakeholders will enhance firm performance. See Chapter Four at 46-54; and Watson, above n 17, at [16.18.4.3]. 364 Susan Watson “Corporate Governance” in The Making of the Modern Company (1st ed, Hart Publishing, Oxford, 2022) 242 at 261.
Cases
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Mostafa Monzur Hasan and Ahsan Habib “Firm life cycle and idiosyncratic volatility” (2017) 50 IRFA 164.
NC Smith and D Rönnegard “Shareholder Primacy, Corporate Social Responsibility, and the Role of Business Schools” (2016) 134 J Bus Ethics 463.
PM Vasudev “Corporate Stakeholders in New Zealand – The Present, and Possibilities for the Future” (2012) 18 NZBLQ 167.
Phil Lewis, Alice Richardson and Michael Corliss “Compliance Costs of Regulation for Small Business” (2014) 9 Victoria University Journal of Law and Governance 1.
Prajit K Dutta and Roy Radner “Profit Maximization and the Market Selection Hypothesis” (1999) 66 Rev Econ Stud 769.
RK Mitchell, BR Agle and DJ Wood “Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts” (1997) 22 Acad Manage Rev 853.
Rebs T, Brandenburg M, Seuring S and Stohler M “Stakeholder influences and risks in sustainable supply chain management: a comparison of qualitative and quantitative studies” (2017) 11 Bus Res 197.
Peter W Roberts and Grahame R Dowling “Corporate reputation and sustained superior financial performance” (2002) 23 Strateg Manag J 1077.
Rosemary Teele Langford “Best interests: multifaceted but not unbounded” (2016) 76 CLJ 505.
S Lakshmi Naaraayanan and Kasper Meisner Nielsen “Does personal liability deter individuals from serving as independent directors? Kasper Meisner Nielsen” (2021) 140 J Finance Econ 621.
S Sivaramakrishnan and others “Critical Success Factors and Outcomes of Market Knowledge Management: A Conceptual Model and Empirical Evidence” (2010) 6 IJKM 1.
SF Copp “Section 172 of the Companies Act Fails People and Planet?” (2010) 31 Co Law 406.
Sanford Schane “Ambiguity and misunderstanding in the law” (2002) 25 T Jefferson L Rev 167.
Siew Peng Lee and Isa Mansor “Environmental, Social and Governance (ESG) Practices and Performance in Shariah Firms: Agency or Stakeholder theory?” (2020) 16 AAMJAF 1.
Sirimon Treepongkaruna, Khine Kyaw and Pornsit Jiraporn “Shareholder litigation rights and ESG controversies: A quasi-natural experiment” (2022) 84 IRFA 1.
Stephen M Bainbridge “Director Versus Shareholder Primacy: New Zealand and USA Compared” (2014) NZ L Rev 551.
Strasburger LH “The litigant-patient: mental health consequences of civil litigation” (1999) 27 JAAPL 203.
Thomas Donaldson and Lee E Preston “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications” (1995) 20 Acad Manage Rev 65.
Turban DB and Cable DM “Firm reputation and Applicant Pool Characteristics” (2003) 24 J Organ Behav 733.
Vertica Bhardwaj and Ann Fairhurst “Fast fashion: response to changes in the fashion industry” (2010) 20 The International Review of Retail Distribution and Consumer Research 165.
Wesley A Cann Jr “Frivolous Lawsuits - the Lawyer’s Duty to Say No” (1981) 52 U Colo L Rev 367.
Woei Chyuan Wong and others “Does ESG certification add firm value?” (2021) 39 Finance Res Lett 1.
Yonjoo Cho and others “Application of ESG measures for gender diversity and equality at the organizational level in a Korean context” (2020) 45 EJTD 346.
Parliamentary and Government Materials
Companies (Directors Duties) Amendment Bill 2021 (75-1) (select committee report). Companies (Directors’ Duties) Amendment Bill 2021 (75-1) (explanatory note).
Department of the Prime Minister and Cabinet Cabinet Manual 2008 (Cabinet Office, Wellington, 2008).
Department of the Prime Minister and Cabinet “CabGuide: Guide to Cabinet and Cabinet Committee Processes” <cabguide.cabinetoffice.govt.nz>.
Dr Duncan Webb “Notes for Select Committee on the Companies (Directors Duties) Amendment Bill.
Legislation Design and Advisory Committee “Companies (Directors Duties) Amendment Bill”.
Legislation Design and Advisory Committee Legislation Guidelines (2021).
Ministry of Business, Innovation and Employment “Departmental Report to the Economic Development, Science and Innovation Committee”.
Ministry of Business, Innovation and Employment “Initial briefing to the Economic Development, Science and Innovation Committee”.
Supplementary Order Paper 2023 (396) Companies (Directors Duties) Amendment Bill 2021 (75-2).
(7 June 2023) 768 NZPD (Companies (Directors Duties) Amendment Bill 2021 – second reading).
(26 July 2023) 769 NZPD (Companies (Directors Duties) Amendment Bill 2021 – Committee of the Whole House).
(1 August 2023) 769 NZPD (Companies (Directors Duties) Amendment Bill 2021 – third reading).
(b) United Kingdom
(6 June 2006) 447 (Company Law Reform Bill – second reading).
Reports
Deloitte Quantifying ESG: How ESG Implementation Impacts Key Valuation Metrics (2023).
Institute of Directors New Zealand D&O insurance – hitting the reset button (Wellington, 2023).
James Chalmers, Emma Cox and Nadja Picard The economic realities of ESG (PwC, 2021). Law Commission Company Law Reform and Restatement (NZLC R9, 1989).
Law Commission Legislation Manual Structure and Style (NZLC R35, 1996). Lucy Pérez and others Does ESG really matter - and why (McKinsey, 2022).
Morgan Stanley Institute for Sustainable Investing Sustainable Reality: 2020 Update
(Morgan Stanley, 2020).
Tensie Whelan and others ESG And Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020 (Rockefeller Asset Management, 2021).
United Nations Who Cares Wins (United Nations, 2004).
Internet Resources
Adam Hayes “How to Tell If a Company Has High ESG Scores” (27 July 2023) Investopedia
Alan Spalter “Customers Are Voting with their Feet” (26 August 2019) The Robin Report
Anna-Louise Jackson and Benjamin Curry “2020 Stock Market in Review: A Year That Defied Expectations” (14 December 2020) Forbes <www.forbes.com>.
Anusha Bradley “Fashion victims: the true cost of H&M clothing” (26 September 2016) RNZ
BNZ “Sustainability Linked Loans” <www.bnz.co.nz>.
Brian Baker CFA “ESG investing statistics 2023” (31 January 2023) Bankrate
Bud Hennekes “Your customers are voting with their feet — are you paying attention to the results?” (13 November 2018) Dor Technologies <www.getdor.com>.
Caleb Silver “The Top 25 Economies in the World” (1 September 2022) Investopedia
Cambridge Dictionary “Vote with your feet” <www.dictionary.cambridge.org>. Crombie Lockwood “Liability insurance” <www.crombielockwood.co.nz>.
David Goodman and Tom Mohammed “Companies (Directors Duties) Amendment Bill – A shift towards the stakeholder view of corporate governance” (5 November 2021) Anderson Lyod <www.al.nz>.
E. Napoletano “Environmental, Social And Governance: What Is ESG Investing?” (22 June 2023) Forbes <www.forbes.com>.
European Centre for Constitutional and Human Rights “Strategic litigation”
Ged Cann “Government lawyers question court's ability to rule on climate change case” (27 June 2017) Stuff <www.stuff.co.nz>.
H&M Foundation “Accelerating change” <www.hmfoundation.com>. IMDB “The True Cost” <www.imdb.com>.
Investopedia “What Is Environmental, Social, and Governance (ESG) Investing?“ (22 March 2023) <www.investopedia.com>.
Irina Ivanova “Amazon workers worry about catching coronavirus on the job” (25 March 2020) CBS News <www.cbsnews.com>.
James Chen “Idiosyncratic Risk: Definition, Types, Examples, Ways To Minimize” (12 May 2022) Investopedia <www.investopedia.com>.
Jason Krychiw “ESG Scores: The Good, the Bad, & Why they Matter” Conservice ESG
Jimmy Ellingham “Justice system bogged down in 'delays of two to three years' for trials” (10 August 2023) RNZ <www.rnz.co.nz>.
Josh Dzieza “Amazon warehouse workers walk out in rising tide of COVID-19 protests” (31 March 2020) The Verge <www.theverge.com>.
Lilly Falcon “How Much Does a NZ Business Lawyer Cost?” (23 March 2021) LegalVision
Megan Rose Dickey “Amazon faces lawsuit alleging failure to provide PPE to workers during pandemic” (13 November 2020) Tech Crunch <www.techcrunch.com>.
Mike Smith “Unleashing the power of New Zealand's small and medium enterprises” (30 September 2020) Stuff <www.stuff.co.nz>.
Ministry of Business, Innovation and Employment “Mandatory climate-related disclosures”
Morgan Stanley “Sustainable Funds Outperform Peers in 2020 During Coronavirus”
Natasha Boyd and Daniella Strazzeri “H&M: Moving Away from Fast Fashion” (29 May 2022) Medium <www.medium.com>.
New Zealand Companies Office “Latest company statistics” (7 August 2023)
<www.companiesoffice.govt.nz>.
New Zealand Institute of Directors “Board charter sample” (2014) <www.iod.org.nz>. New Zealand Parliament “Companies (Directors’ Duties) Amendment Bill”
Nikki Mandow “Business growth and the role of green finance” (22 December 2022) Newsroom <www.newsroom.co.nz>.
Phil Smith “Louisa & Louise: How to member’s bill” (1 August 2021) <www.rnz.co.nz>.
PwC “Companies failing to act on ESG issues risk losing investors, finds new PwC survey”
SGB Media “KMD Closes NZ$310 Million Debt Refinancing Tied To Sustainability” (19 May 2023) <www.sgbonline.com>.
Sarah Robson “Shopping for change: Busting the supermarket duopoly” (18 July 2022) RNZ
Sarah Thomson “I took the climate change minister to court and won – kind of. Now I’m looking at you, James Shaw” (4 November 2017) The Spinoff <www.thespinoff.co.nz>.
ANZ “Environment” <www.anz.co.nz>.
Simon “Independent director remuneration – how much should you pay?” (1 February 2023) Stimulus <www.stimulusnz.com>.
Tao Lin “NZ directors’ fees unfair compared with international standards: IOD” (14 August 2016) Stuff <www.stuff.co.nz>.
The Babcock Law Firm “Frivolous Lawsuits: What Are They and How Do They Affect You?” <www.injurylawcolorado.com>.
The Guardian “Amazon workers walk out over lack of protective gear amid coronavirus” (31 March 2021) <www.theguardian.com>.
The New Zealand Parliament “Parliament Brief: The legislative process” (15 May 2020)
Unilever “2010 – 2020 – The birth of Unilever’s Sustainable Living Plan”
Unilever “Planet and Society” <www.unilever.com>. Unilever “Select Location” <www.unilever.com>.
Unilever “Unilever’s Sustainable Living Plan continues to fuel growth”
United Nations “Sarah Thomson vs. The Minister for Climate Change Issues”
United Nations “THE 17 GOALS” <www.un.org>.
Westpac NZ “The Warehouse Group and Westpac NZ sign $70m Sustainability-Linked Loan with broad innovative sustainability targets” (8 November 2021) <www.westpac.co.nz>.
Westpac “Climate Action” <www.westpac.co.nz>.
Whanganui Chronicle “Ātihau-Whanganui Incorporation receives BNZ’s first Māori Agribusiness Sustainability Linked Loan” (1 December 2022) NZ Herald
Other Resources
Ashleigh Heath “Achieving Long-Term Value Through Stakeholder Theory: Proposed Amendments to The Companies Act 1993” 10 VUWLRP 44/2020.
Financial Markets Authority Corporate governance in New Zealand: Principles and guidelines (2018).
Ian Llewellyn “Friedman’s ghost raised in Directors Duties Bill” BusinessDesk (8 June 2023).
Jason Hung Shareholder Primacy Theory vs Stakeholder Theory (University College London, 2020).
Jason Mika Manaakitanga: Is Generosity Killing Māori Enterprises? (Australian Centre for Entrepreneurship, 2014).
John R Allison “Five Ways to Keep Disputes Out of Court” [1990] Harvard Business Review.
Kai Du, Jarrad Harford, and David (Dongheon) Shinat Who Benefits from Sustainability- linked Loans? (Social Science Research Network, 2022).
Matthias Horn The Influence of ESG Ratings on Idiosyncratic Stock Risk: The Unrated, the Good, the Bad, and the Sinners (Germany, 2023).
Milton Friedman “A Friedman doctrine - The Social Responsibility of Business Is to Increase Its Profits” The New York Times (1970).
NZX Guidance Note: NZX ESG Guidance (2023). NZX NZX Corporate Governance Code (2023).
Pablo Iglesias-Rodríguez ClientEarth v Shell plc and the (Un)Suitability of UK Company Law and Litigation to Pursue Climate-Related Goals (Oxford Academic, 2023).
Philipp Krueger and others The Effects of Mandatory ESG Disclosure Around the World
(2021).
Prudence Ho “Leveraged loan investors push private equity firms on ESG” [2019] Thomson Reuters.
Richard Carrizosa and Al (Aloke) Ghosh Sustainability-Linked Loan Contracting (Social Science Research Network, 2023).
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