Section 172 Revisited: Are boards acting in the best interest of their stakeholders after all?

Posted by Daria Efrim on 9 July 2019
Daria Efrim

2019 is yet another year of corporate governance reforms intended to change corporate reporting behaviour and strengthen the corporate governance framework in the UK. Along with the implementation of the 2018 UK Corporate Governance Code, new reporting obligations under section 172 of the UK’s Companies Act 2006 have been introduced under the Companies (Miscellaneous Reporting) Regulations 2018. The revised reporting requirements apply to financial years starting on or after 1 January 2019, with the first compliance statements being published in 2020.

Section 172 stipulates that companies of a certain size (those with more than 250 employees, or turnover of more than £36 million, or total balance sheet assets in excess of £18 million) have to report on how the directors have complied with their duty to promote the success of the company. The disclosure should be included in the strategic report in the case of listed companies, whereas unlisted companies should make the reporting available on their website.

Directors are required to act in a way which, in their view, promotes the success of the company for the benefit of its members as a whole. In doing so, however, directors must consider the collective interests of the wider group of stakeholders, including employees, suppliers, and customers. The regulation makes note that in certain circumstances, such as insolvency, the duty to the company is overridden and directors should act or consider acting in the interest of creditors.

How to structure the section 172 statement?

The GC100 has published guidance on the practical steps boards can take to help discharge their duty. The guidance moves away from the traditional and shareholder-oriented approach and draws the attention to the importance and impact that a company’s wider stakeholder base can have on its development. There is increasing acknowledgement of the role of businesses in society and their duties in regards to social, environmental and governance factors. In the long run, boards should pursue aligning the interests of shareholders with those of other key stakeholders affected by the company’s actions, including workforce, environment or communities.

The guidance highlights that there is no “one size fits all” approach. Companies have the liberty to choose how and to what extent they disclose this information. However, the fact that there is no set reporting framework may allow companies too much room for interpretation. According to a survey conducted by ICSA on the effectiveness of the new regulation, concerns were raised about the actual impact on the wider interests of stakeholders. Some respondents fear that the new disclosures would become “boiler-plate” and a box-ticking exercise. Other respondents have difficulties in "trying to understand how and when there may be reporting requirements which are legitimately required, while not jeopardising business activities prematurely or needlessly", while others have already started developing their stakeholder engagement plans. 

Given that companies don’t have to address the requirements in their 2019 reporting, many have chosen to skip making a statement where they specifically address the matters set out on in section 172, while others have mentioned that they have started the process and will include the disclosures in the annual reports starting from next year.


“From next year, the annual report will include disclosures as to how the Directors have discharged their duty under section 172 of the Companies Act 2006 and how the interests of customers and clients, colleagues, suppliers and other stakeholders have informed the Board’s decision-making.”


Some companies have already complied with the new requirements and have included a separate section dedicated to compliance with section 172 in the strategic report.


“It (the board) considers key stakeholders in its decision-making and, in doing so, ensures that Directors comply with their duty under section 172 of the Companies Act 2006.”


Disclosure on section 172 reporting is improving and more companies disclose detailed information about who their stakeholders are, what matters to them and how engaging with them feeds into company's decision making. While there are some concerns regarding to what extent the compliance requirements will benefit the stakeholders, the new reporting obligations have the potential to show the way towards promoting long-term sustainable performance.

Endnotes:

[i] GC100 (2018). Guidance on Directors' Duties Section 172 and Stakeholder Considerations. Available at: https://uk.practicallaw.thomsonreuters.com/Link/Document/Blob/I59d0a3ddd47f11e8a5b3e3d9e23d7429.pdf?targetType=PLC-multimedia&originationContext=document&transitionType=DocumentImage&uniqueId=7835d28e-f1c6-4aa8-aa13-74a9bc6d5cee&contextData=%28sc.Default%29&comp=pluk

[ii] ICSA (2018). Do you think the new section 172 reporting requirements will improve companies’ consideration of their wider stakeholders?  Available at: https://www.icsa.org.uk/knowledge/governance-and-compliance/indepth/comment/quick-question/do-you-think-the-new-section-172-reporting-requirements-will-improve-companies-consideration-of-the

 


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