Section 172 Reporting Requirements

The Chartered Governance Institute (known as “ICSA”) published updated practical guidance on 25 August 2020 for company directors on their general duties under the Companies Act 2006 (the “Act”), which introduced new reporting requirement under section 172 of the Act.

The guidance has been produced primarily for quoted public companies but much of it also applies to private companies, particularly those of a large size. Large private and public companies are required to include in their strategic reports a statement explaining and demonstrating how the company's directors have had regard to the matters in section 172(1)(a) to (f) of the Act when performing their duty to promote the success of the company (the “Section 172 Statement”).  To recap, those factors are:

• “(a) the likely consequences of any decision in the long term,
• (b) the interests of the company's employees,
• (c) the need to foster the company's business relationships with suppliers, customers and others,
• (d) the impact of the company's operations on the community and the environment,
• (e) the desirability of the company for maintaining a reputation for high standards of business conduct, and
• (f) the need to act fairly as between members of the company.”

Companies required to produce a Section 172 Statement must publish it on the company's website and in its annual report.  The guidance offers examples of how the key factors in s172 may be considered in decision-making, and the Section 172 Statement is likely to include:

• issues, factors and stakeholders that the directors consider relevant under s172(1)(a) - (f) of the Act;
• how the directors formed their opinion;
• the main methods for stakeholder engagement;
• the effect of having regard to the above.

The Section 172 Statement should focus on matters of strategic importance to the company and will depend on the circumstances, size and complexity of the business, e.g:

• • the longer term consequences of board decisions;
  • workforce and employee engagement: factors to consider here may include remuneration including gender pay gap reporting, diversity and inclusion, methods of engaging and communicating with staff, and pertinently in the wake of COVID-19, measures to protect the health and safety, including mental health and wellbeing, of staff;
  • relationships with suppliers and customers: this would include factors such as supply chain sustainability, responsible sourcing including environmental and modern slavery considerations, and complying with supplier payment terms;
  • environmental and community impact: this may include systems to monitor the company's environmental impact and efforts to adopt greener practices, such as increased recycling initiatives and the use of renewable energy;
  • discussion of business conduct, values and culture;
  • balance between major investors and minority shareholders and engagement with key stakeholders.

The introduction of the new reporting requirements arrives at an interesting time, as the era of COVID-19 restrictions which began in March 2020 has increased the scrutiny of companies' ethical as well as financial performance.  Industry commentary suggests that those companies perceived to be “doing the right thing” have benefitted both commercially and reputationally. The new reporting requirements will allow businesses to actively demonstrate their performance on such issues. If you have any questions on anything covered in this article, please contact Dominic Bent from our Corporate Team.