AMEND THE COMPANIES ACT 1993 TO ACCELERATE NZ GREENHOUSE GAS REDUCTIONS

Personal submission on NZ Emission Reduction Plan?

Richard Lauder

PROPOSITION

The operations of companies are a very large contributor to NZ’s greenhouse gas emissions.

There is a current opportunity to drive substantive behavioural change by companies and hasten their action to reduce greenhouse gas emissions by adapting and extending the proposed changes to the Companies Act 1993 contained in the Companies (Directors Duties) Amendment Bill.

By including in the Amendment an additional obligation on directors of companies to take all practicable steps to prevent or minimise all harm, specifically including environmental harm, directors will immediately be obligated to assess and address (where practicable) greenhouse gas emissions associated with company operations (and within their supply chains).

The additional obligation to prevent or minimise harm can be modelled on existing mechanisms contained in the Health and Safety at Work Act 2015.?

With such an obligation on directors, this will make a large and fast change to NZ's emissions through a simple legislative change, and prevent the need for more widespread and targeted regulation.

BACKGROUND

I have recently written a lengthy submission?to the Institute of Directors (IoD), for its review of directors’ duties, outlining my long-held concern that companies and shareholders have long been beneficiaries of free or discounted negative externalities, at a dispersed cost to society and planet, and that this is not appropriate. Freely being able to emit greenhouse gases is one of those negative externalities where harm is dispersed but companies and shareholders benefit.

While the full submission to the IoD asserts changes need to be made to the IoD’s Code of Ethics and best practice guides, I have also asked the IoD to recommend a change to the Companies Act 1993 such that it includes a new obligation on directors to ensure they take all practical steps to ensure that the company they govern does no harm.?

Coincidentally, Dr Duncan Webb’s members bill was drawn while the IoD review was in progress, so I intend to submit on that proposed change too.

And now a third opportunity has arisen via this submission process – perhaps a perfect storm to implement positive change.?

ARGUMENT

I have six times been a chief executive (or equivalent) of companies, and have also sat on and chaired a number of boards.

There is a dominant view in many, but not all, NZ boardrooms that either:?

? a director’s duty is to maximise shareholder returns, or?

? that companies can act as they wish, so long as it’s within the law.?

While either view is philosophically different, in effect both establish a company’s disposition to make decisions where profit takes precedence over planet. Companies can pollute to make profit, so long as it's legal. Legal, but bad, environmental outcomes are, in effect, incentivised because they usually come with no cost, and actually doing nothing to address the harm is in the best interest of the company and its shareholders.

This is wrong. Companies and shareholders should not derive benefit from doing harm, in particular when it can be avoided.

In my own experience, when the Health and Safety at Work Act 2015 entered into law, directors of companies immediately became sensitive to workplace H&S practices as directors became responsible (and liable) under this new law. As a Chief Executive at the time, I was already obligated and liable for the safety performance of the company under the prior law, the Health and Safety in Employment Act 1992, and in my view the company was acting appropriately in its management of H&S. But as soon as directors became liable, scrutiny and approval of investment in H&S really stepped up. Numerous other Chief Executives I spoke to around that time noted the same behavioural changes in their boardrooms.

Based on this observed behavioural transformation to new H&S law, I believe a change to the Companies Act 1993, obliging directors to assess harm on a wider basis than just H&S harm, and specifically including environmental harm and therefore greenhouse gas emissions, would have a similar immediate impact on many companies’ actions to actively address climate harming activity.?

Once directors have a legal obligation, with possible attached liabilities, companies will focus on the issue with vigour, and investments will immediately start to be made in emission mitigation. Broad obligations via the Companies Act may well also avoid need for more specific regulation or targeted financial incentives to push companies to contribute to NZ emission reduction commitments, saving the country time and money.?

RECOMMENDED CHANGE TO THE COMPANIES (DIRECTORS DUTIES) AMENDMENT BILL

I am not a lawyer nor do I have any experience in drafting legislation. But as an indication of where I believe the opportunity lies to address emissions by an amendment to the Companies Act 1993, taking into account the current Amendment Bill, I offer the following example of the type of change I am proposing.?

The suggested addition of a new section 131A to the Companies Act doesn’t just address climate impact, but also addresses wider ethical issues around all free negative externalities from company operations.

Section 131 amended (Duty of directors to act in good faith and in best interests of company)

After section 131(4), insert:

(5) To avoid doubt, a director of a company must, 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.

(New) Section 131A?Duty to avoid harmful activity

Directors of all companies shall routinely assess all potential and actual sources of harm to staff and other persons, to the environment and biosphere, to pristine natural places and heritage sites, and to the communities in which they operate, and take all practicable steps to firstly eliminate that harm, and where elimination is not possible, to minimise that harm.?

This obligation on directors also applies to the management of, and relationship with, the Company’s supply chain and contractors.