Labour’s “fix” makes company law worse

Roger Partridge
Insights Newsletter
23 June, 2023

When it comes to pointlessness, the Companies (Directors Duties) Amendment Bill takes some beating.  

When drawn from the ballot, the Bill proposed amending section 131 of the Companies Act 1993 dealing with the duty of directors to act in the best interests of the company.

Labour MP Duncan Webb was the Bill’s mastermind. He wanted to make clear that, when considering the best interests of a company, directors can consider the Treaty of Waitangi and a mix of environmental and social and considerations – along with profit maximisation.

There’s just one problem. The Companies Act has never suggested directors are prohibited from taking a broad view of what is in a company’s long-term interests.

What then would the courts make of the new law? Would they presume Parliament was simply stupid in passing unnecessary legislation? Or would they read into the new law something that was never intended? Either way, no good could come.

Even officials struggled to say anything positive about Webb’s Bill. The Ministry for Business, Innovation and Employment’s advice to the Select Committee warned the proposed law “may have unintended consequences including creating confusion for directors…”

MBIE’s conclusion was blunt: The Bill should not proceed.

Sadly, the Select Committee has only attempted to temper the Bill’s confusing provisions.

The amended Bill now simply states “To avoid doubt, in considering the best interests of a company… a director may consider matters other than the maximisation of profit.”

Even this formulation is misguided. The problem centres on the difference between short-term and long-term profit maximisation.

Most directors know that if they focus narrowly on short-term profit maximisation, they may harm a company’s longer-term interests. That’s precisely why few directors will ignore broader factors in considering a company’s best interests.

But most shareholders want companies to maximise long-term profits. Indeed, that’s exactly what most of us are relying on with our KiwiSaver investments.

The Bill’s failure to spell out the difference between short- and long-term considerations will create the very confusion the Select Committee was hoping to avoid.

Worse still, Labour MP Camilla Belich, who is now responsible for the BIll, signalled at its second reading that Labour is drafting a Supplementary Order Paper to reinstate much of what was wrong with the Bill’s original incarnation.

Either way, if the Bill’s object was to make company law less workable it will achieve its aim. But if it was trying to do good, it is worse than useless.

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