Oliver Mander was a panellist at the IoD conference focusing on this topic. The conference was conducted under ‘Chatham House rules’ – so while this article reflects the author’s thoughts, it does not necessarily reflect the full panel discussion. If you’re interested in some of the views from the panel, check out this LinkedIn video shot immediately after the session.
There has been plenty of pressure heaped on Directors over the last decade. The rise of stakeholder groups covering all aspects of societal pressure, from Māori land rights to climate activism, from modern slavery to gender equality, have all tested the best and brightest directors of organisations large and small.
This isn’t always a pleasant experience for the directors (nor executives).
To some extent, NZSA is part of that landscape. Ultimately, an organisation like ours relies on establishing and sustaining credibility to achieve our aims. We take the approach that shouting loudly from the sidelines in a manner that inflects little meaningful change does not offer value to members or our stakeholders. Reputation matters.
The same is true of Boards. Sustaining and enhancing reputation is a key element of acting in the best interests of the company, as required by the Companies Act. Just how ‘key’, of course, is a matter for conjecture. Arguably, a consumer-facing company needs to be more mindful of its perception amongst consumers than an organisation led by business-to-business relationships.
Regulating the change?
There is no doubt that progressive Boards are beginning to recognise the impact of societal change. At a ‘micro-level’ we have seen the likes of Synlait, Comvita and KMD Brands amend their Constitutions allowing them to take a broader ‘stakeholder’ approach when considering issues. This reflects a rise in ‘B-Corp’ certification globally, recognising companies that have voluntarily met certain standards related to environmental and social governance (all three examples are B-Corp certified).
At a macro-level, we saw the last NZ Government attempt to introduce proposals to broaden the application of s.131 of the Companies Act by including a reference to specific ESG-related factors in assessing the best interests of the company. While the initial proposals were significantly watered down, this did result in the addition of a new sub-section to s.131:
s.131 (5) 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).
Companies Act 1993
Interestingly, this is the first reference anywhere in the Act to maximisation of profit being the key factor in the role of Directors.
It is worth noting that NZSA did not support the original wording in the initial proposals; we believed that their inclusion as an “exhaustive” list of factors would limit the breadth of issues considered by directors under s.131 of what was in the best interests of a company, while also introducing a whole slew of definitional issues. After all, the list of known and unknown factors in decision-making are as many as the number of companies themselves.
We remain unconvinced that the new s.131 (5) adds much value to the existing consideration required by directors to act in the company’s best interest.
External pressure – and a Board response
There are plenty of stakeholder interest groups vying for the ear of our corporate Boards. From the Covid-19 wage subsidy to Ihumātao, and a plethora of issues in between – a Board needs to be ready to identify when a response is required and what form that response should take.
That implies a whole lot of focus required by Boards on risk management, with the experiential and thought diversity across a Board’s membership to cope with whatever issues are most likely to arise. The greater the complexity, the greater the need for diversity. And the increasing scale of complexity is not going away anytime soon.
Ultimately, a Board’s focus should always be on the strategy of the company and the long-term performance that stems from that. That is truly acting in the best interests of the company. That is not to discount the validity of ESG issues or other factors that impinge on the reputation of the company; sustaining an environmental or social license to operate forms an increasingly relevant ‘hygiene factor’ without which a company’s strategy becomes irrelevant.
So, while focused on strategy, performance and assurance of delivery, Boards should have the diversity of thought and experience (capability) as well as the capacity to react when needed. This latter point is why NZSA (and other investor groups) keeps a keen eye on the workload of individual directors.
Even if complexity is increasing, this is not a theme unique to directors. Most individuals, both in their work and day-to-day lives, are required to cope with the ever-increasing demands of the relentless society we have created. Boards that ‘get ahead of the curve’ with proactive, meaningful relationships with key stakeholders are likely to benefit from the learning provided by a fresh perspective – and be in a better position to manage those relationships when the going gets tough.
There is also honest, old-fashioned productivity. A Board that can introduce new ways of working, creating either efficiency or focus on the degree of decisions and their support materials will be in a stronger position to add value back to shareholders.
Regulation
Undoubtedly, compliance activity is a key factor in increasing both Board and executive workload – and sometimes, cost to shareholders. For example, NZSA knows from its conversations with listed issuers that the new Climate-Related Disclosure (CRD) regime has cost most medium-large issuers the upper half of six figures; and for those that have started their CRD journey too late, the greater the cost. That doesn’t mean a focus on climate responsibility is a bad thing – it simply ‘internalises’ the cost associated with a long-held externality. For many companies, it is part and parcel of doing business as they ‘lean-in’ to the thematic surrounding climate-related activities (NZ Windfarms, anyone?).
NZSA encourages companies to broaden their environmental disclosures beyond climate, as there are other aspects that may create more meaningful risks and opportunities to a specific business. For example, soil and water pollution management is likely to be part of the broader environmental sustainability journey for a dairy company, while responsible energy use is likely to be a telling factor for a cloud / IOT-based technology provider.
I refer to my comments around ‘complexity’ above.
Unfortunately, however, our statutes and regulations are rarely that nuanced.
NZSA has been a bit of a stuck record around key issues where we think a more nuanced regulatory solution is required. Our advocacy around a minority interests voting regime is an example – we see this as a fit-for-purpose solution that plays well to the unique factors impacting the New Zealand listed market, including the relatively high number of companies that have a major shareholder. Our proposal adds zero compliance cost – but simply reflects a fit-for-purpose structure in a specific situation.
We also see some opportunity for simplification of the Companies Act – particularly as it interacts with related legislation, such as the Financial Markets Conduct Act, the Financial Reporting Act and Takeovers Code. That’s before you get to any specific expectations set by the External Reporting Board (XRB) or any other agency. We know that simplification is dear to the heart of our current Minister of Commerce.
While we believe legislation can be simplified, we also believe this should not come at the expense of investor protections. In fact, there is a good argument to include “number of shareholders” as part of the test as to what creates a large company (read more about that at this link), creating a more proportionate regulation regime that docks neatly with public capital markets.
Shareholder Expectations of Regulation and Issuers
Fit-for-purpose. Nuanced. Simple. Holistic.
Those seem like very simple words – and yet, it’s clear that they mean different things to different people. Each comes with a trade-off that plays to the interests of different stakeholders. Ultimately, regulations and statute set out a clear baseline of expectations for everyone.
We should not be afraid of ‘fit for purpose’ regulations that differentiate us from competitor nations. Differences should add value in their own right to New Zealand as a whole. For example, while NZSA might be encouraging the NZX to adopt a minority interests voting regime that is unique compared to most jurisdictions, we are also clear that shareholder involvement in remuneration disclosures does not need to operate to the same extent as it does within Australia.
New Zealand is not alone in regulators (and society) demanding more of our Boards. In our listed space, it would seem that Boards have risen to the challenge. The Governance Quality Index (GQI), calculated by NZSA, seems to show an underlying improvement in governance structures and disclosures over the last three years. New Zealand can no longer be regarded as the ‘wild west’ for investment, and that should create confidence for local and international investors alike.
When it comes to companies, from a shareholder perspective, a primary focus on ‘compliance’ has the potential to create a distraction for Boards, while ultimately setting a low bar for shareholders. The ability of a Board to determine strategy and execute spectacularly against that remain the key hallmarks. In New Zealand’s best-performing companies, issues related to complexity seem to simply ‘melt away’ in the face of a great strategy and sustained, long-term performance.
That is not to say that those companies are not working hard at being compliant – they are. It’s simply that it is not their primary focus.
So – have Boards lost control?
In a nutshell – and in the wise words of my fellow panellist – they should not have.
And all credit to them for that. But, to quote the immortal words of Billy Connolly, they will need to “stay awake” to ensure that they can stay on top of the increasing complexity of the world we live in.
Just like all of us.
Oliver Mander
Just in case you wish to be reminded of the Billy Connolly clip referred to above…but be warned, contains bad language.