A letter sent each year to Air New Zealand setting out government expectations has prompted a debate over changing the law to reform directors’ duties.

MPs in Wellington will now scrutinise a bill that would, if passed, allow New Zealand’s directors to consider ESG issues as part of those duties.

The story begins in April when an urgent debate was called in the New Zealand parliament to consider the finance minister’s annual note to the country’s airline. That letter included expectations on climate change and the company’s relationship with employees. Not everyone considered the note reasonable.

David Seymour, an MP for the ACT party, argued the letter “set out a series of mutually competing and, in some cases, contradictory expectations that … put the directors of that company in an impossible position.”

Indeed, Seymour thought the letter so ill conceived it might place the airline’s directors in a position where they “simply cannot discharge their legal obligations”.

The argument led directly to a member’s bill, sponsored by Labour MP Duncan Webb, which last week won a ballot for consideration by parliament.

That bill, on its way to a first reading, addresses section 131 of New Zealand’s Companies Act and offers clauses allowing directors to consider reducing environmental impact; “upholding high standards of ethical behaviour”; “fair and equitable” employment practices; and “recognising the interests of the wider community”. New Zealand directors would also be able to consider the Treaty of Waitangi, the key document shaping relations between the British Crown and Mãori chiefs in the territory.

In short, though permissive, the reform opens the door for directors to explicitly consider key ESG factors along side their established duty to consider the best interests of “the company”.

Clarity on existing practices

Some observers see the reforms offering clarity on practices already in use among New Zealand’s directors in New Zealand. Lawyer Joe Windmeyer, writing for Lex, a website covering legal issues, describes the bill as a “declaratory reform rather than one that will drive a change in practice”.

But, if it is necessary to drive change, Windmeyer believes the proposal might require more work. “If clarity is the aim,” he writes, there are some important questions to answer. Perhaps, he suggests, it might even take inspiration from the UK’s section 172, though it is unclear whether he is aware that a campaign is also under way to rewrite key parts of this legislation.

Reform of director’s duties is not without support in New Zealand. In July the country’s Institute of Directors published a paper supporting an overhaul of directors’ duties.

In that document the IoD says “all eyes” are now on boards and the way they achieve “sustainable success” for “shareholders, employees, customers and communities”. The IoD also notes it has been 30 years since the introduction of New Zealand’s Companies Act.

“To stay relevant and at the forefront of governance globally, it is now a timely opportunity for the government to review the framework for directors’ duties in the Act,” the IoD says.

There are other backers too. Lawyer and environmental activist Steven Moe describes the proposed reforms as opening an era of “increased scrutiny” for companies.

“They are the start of real change that will enable us to better conceive the place of companies in our society and positively frame the role and duties of directors,” he writes.

Reform of UK directors’ duties

Meanwhile, campaigners in the UK have been at the Labour and Conservative party conferences canvassing support for a reform to section 172. Board Agenda understands there has been a favourable response from many MPs giving organisers at the Better Business Act campaign cause for optimism.

Their proposals would see the current duty to promote the “success” of the company replaced with “purpose of the company”, a shift that could underline a stakeholder approach to governance in the law.

The campaign has the support of many organisations, including John Lewis, Innocent Drinks and the UK’s Institute of Directors.

There have been concerns for some time that persuading companies to focus on ESG, purpose or stakeholders would not happen without changes in law. New Zealand may be on the brink of becoming the first country to make the move.