On 14 October 2020, the Financial Reporting Council Lab published new guidance to assist companies in preparing section 172 statements about how to perform their duties to promote the success of the company.
What is a section 172 statement?
The purpose of the statement is to explain how directors have had regard to the factors listed in s172(1)(a) – (f) of the Companies Act 2006 when fulfilling their legal duty to promote the success of the company.
What is the FRC’s guidance?
The FRC’s guidance is broken down into 3 key categories:
The statement should not simply replicate the s172 requirements and then state compliance – it should reflect on precisely how the company met the requirements during the previous year, and, where relevant, what the board plans to do in the future.
It should be honest, reflecting on where trade-offs have been made during the decision-making process, and not contradict information given elsewhere in the company’s annual report. It should set out how the board oversees engagement with the company’s stakeholders (for example, how issues raised by stakeholders are escalated to board level and how grievances are managed), and should include any key performance indicators on key stakeholders which are being monitored by the board.
Finally, the statement should explain what steps have been taken as a result of feedback received from stakeholders, and how the board plans to address any stakeholder concerns.
The board should think about where the s172 statement sits within its strategic report, and ensure it is placed in a suitable context which enables it to flow with the information around it. The statement is not just about stakeholder engagement: it needs to focus on how the board has promoted the success of the company, and considered the long-term consequences of its decisions.
The board should highlight key decisions and activities which might be included in the statement as they happen throughout the year, rather than waiting to compile them at the end. Companies should consider tailoring template board agendas to include prompts for the directors to consider which stakeholders’ interests will be relevant to the decision at hand.
Written by Ellen Robinson
“The board should understand the views of the company’s key stakeholders and describe in the annual report how their interests and the matters set out in section 172 have been considered in board discussions and decision-making”. UK Corporate Governance Code