What is a section 172 statement?
Section 172 of the Companies Act 2006 deals with the directors’ duty to promote the success of the company for the benefit of shareholders. The section 172 statement, more specifically, is a factual statement included in the Strategic Report that describes how the directors have performed their duties.
Section 172 requires a director of a company to promote the success of the company for the benefit of shareholders by having regard to:
- the likely consequences of any decision in the long term,
- the interests of the company's employees,
- the need to foster the company's business relationships with suppliers, customers and others,
- the impact of the company's operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.
Who has to make a section 172 statement?
For periods commencing on or after 1 January 2019, all large companies must include a section 172 statement in their Strategic Report.
There are exemptions that exist for certain small and medium-sized companies. A company is considered large, and thus required to produce a section 172 statement, if it meets two or more of the following criteria:
- Turnover of more than £36 million;
- Balance sheet of more than £18 million; and/or
- More than 250 employees (regardless of locality).
However, and as included in the legislation (available here), a company is not entitled to take advantage of any of the exemptions relating to companies qualifying as medium-sized if the company is a public company.
A public company is defined in the legislation (available here) as a company limited by shares or limited by guarantee and having a share capital.
You can find out more information about the applicability of the exemption in the FRC’s paper here.
What should be included in a section 172 statement?
Whilst there is not a set structure for the section 172 statement, detailed guidance on what needs to be included to meet the requirements is available, and we have included links to this guidance below.
Whilst what should be included is dependent on the individual circumstances of each company, the statement should broadly focus on matters material to shareholders and include information on the following:
- The matters, factors and stakeholders considered relevant in complying with the section 172 requirements, and how these have been formed;
- The main methods that directors have used to engage with stakeholders and understand the issues to which they must have regard; and
- Information on the effect of that regard on the company’s decisions during the financial year.
The statements may typically be built around reference to some of the content in the Strategic Report, namely relating to business model, strategy, culture and governance.
Is there guidance on producing section 172 statements?
The Government and FRC have both issued guidance on section 172 statements:
- FRC – Guidance on the Strategic Report (Section 8 – content elements for section 172 reporting)
- BEIS – Corporate Governance (Section D – reporting on matters in section 172)
- FRC Lab – Section 172 statements: How to make them more useful
A number of QCA members have also issued guidance on what to include in section 172 statements:
- KPMG – The section 172 statement
- Deloitte – Board briefing on the new section 172 statement
- BDO – Tips for preparing the new section 172 statement
We hope that you find this article useful, but please note that it is for general information purposes only and is not a substitute for specific legal or other advice.