We’d like to draw your attention to the fact that many companies will this year have to report for the first time on how directors have fulfilled their duty under section 172 of the Companies Act 2006. This comes into force for companies with year ends on or after 1 January 2019.
The companies affected by the new reporting requirements are those that meet two of the three criteria below :
- Turnover of more than £36m
- Balance sheet of more than £18m
- More than 250 employees (regardless of locality)
Section 172 of the Companies Act 2006 requires every director to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard (amongst other matters) 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.”
Whilst this requirement hasn’t changed, larger companies, both privately held and those listed on the Main Market and AIM, that exceed the thresholds above are required to be more transparent about how they are considering the interests of wider stakeholders.
The challenge will be how the company communicates effectively to its stakeholders the ways in which its directors have fulfilled their duties in its section 172 statement. Companies applying the QCA Corporate Governance Code or the UK Corporate Governance Code will already be considering the issues set out in section 172. Further, companies may also be reporting relevant non-financial information within their strategic reports. So boards will benefit from working on how best to draw on existing information included in their strategic report and corporate governance reporting together with providing more information about board decision making (source: Deloitte Board Briefing on the new Section 172(1) Statement)
The Institute of Business Ethics has released a Board Briefing ‘Ethics and Section 172 – key questions for informed board decision making’ which provides a ‘refresher’ on the current scope of s172 by considering each element in turn and providing practical guidance for boards focused on making decisions as a group, answering questions about the new reporting requirements and highlighting individual issues for directors to consider. The Briefing can be accessed here.
The FRC has also published guidance on the strategic report including guidance on how to report on section 172. The FRC guidance can be found here.
In addition, BEIS has also developed a Q & A on The Companies (Miscellaneous Reporting) Regulations 2018, which can be accessed here.
Questions companies should ask themselves:
- Am I required to provide a Section 172(1) Statement?
- How can I draw on existing information in my strategic report and corporate governance reporting to effectively communicate how directors have fulfilled their section 172 obligations?