Risky business

By - , Build 188

Upcoming legislative changes, the challenges around COVID-19 and how businesses deal with them and problems with the supply chain are all potential risk areas that company directors should be aware of.

MANY CONSTRUCTION businesses operate using a company structure to simplify processes and because a company provides some comfort that liability for any trading failures will be limited to company assets.

Directors bear responsibility for compliance

As those responsible for making major financial decisions, setting policy and governance of a business, directors are ultimately liable for any failures to comply with the law. However, the risk environment for directors and officers is increasing due to COVID-19, legislative changes and other factors.

The following covers some areas that will see changes and that directors and officers need to be aware of.

Health and safety risks

Health and safety is a significant risk that is front of mind for all directors in the building and construction industry. Managing COVID-19 and the traffic light system has only increased this risk.

Businesses have had to conduct a risk assessment and assess the risk to all staff of having unvaccinated employees in the workplace. This does not preclude unvaccinated employees bringing claims against their employers on several grounds, including discrimination.

The good news is that, while this may result in personal grievance claims, it is unlikely to result in successful claims against the directors for breach of their duties under the Companies Act 1993. This is because they are acting in the best interests of the company. However, given this additional complexity, it would be prudent to perform a review of health and safety processes with an independent expert.

Employment condition changes

There are 22 proposed changes to the Holidays Act 2003 likely to come into force in 2023.

While the recommendations remove a lot of the ambiguity of the current Act, the practical implementation of these changes could have significant financial impacts for business including the removal of pay as you go (PAYG) holiday pay for fixed-term employees and new calculation methods for annual leave.

The employer – and ultimately the directors – are responsible for maintaining the accuracy of payroll calculations, and amid heightened scrutiny around payments, prudent employers are reviewing their payroll processes and budgeting for the financial impacts of the new legislation. The Employment Relations Authority has the power to levy fines of $10,000 or more for non-compliance.

Directors to consider ESG factors

A proposed change to the Companies Act specifies that directors may consider environmental, social and governance (ESG) factors when determining what is in the best interests of the company. These include:

  • recognising the principles of the Treaty of Waitangi (te Tiriti o Waitangi)
  • reducing adverse environmental impacts
  • upholding high standards of ethical behaviour
  • following fair and equitable employment practices
  • recognising the interests of the wider community.

The consensus from legal professionals so far is that it is unlikely to create further opportunity for litigation. Notably, the amendment says the directors may consider, not must consider. However, it is important for directors to consider all the factors mentioned when it comes to making decisions. This will support reduced reputational risk and risk of employee litigation – not to mention the associated costs.

Documentation of ESG considerations should become a standing agenda item in Board meetings.

Global supply chain disruption

Disruption in global supply chains is affecting the ability to source product and meet construction deadlines. Businesses should review how this will impact their contractual commitments and assess and manage their risk exposure.

Solvency pressure

Although businesses have had access to COVID-19 government support measures, the supply chain disruptions can cause milestone/progress payments to be delayed, putting pressure on cash flow and short-term liquidity. Directors should pay attention to compliance with their duties under section 135 (Reckless trading) and section 136 (Duty in relation to obligations) of the Companies Act.

Should you become a company director?

Although the risks faced by directors are constantly evolving, their mere presence should not be a deciding factor in whether to accept an appointment.

In the absence of a formal certification system, directors should ensure they have the appropriate risk identification and mitigation frameworks and that the management of these risks is reported to the Board.

Directors’ and officers’ liability insurance is an additional layer of protection to help with the costs of defending a claim as funding even a relatively small claim can be significant.

For more

For best-practice advice for directors and officers, contact your advisor or Asheel Bharos at [email protected].

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Articles are correct at the time of publication but may have since become outdated.

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