Under s172(1) of the Companies Act 2006, a director has a duty 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 to various factors including the long term consequences of the decision, the interests of the employees and the impact on the environment (s172 Factors – see the Appendix below for a full list). This duty is owed to the Company.
In June 2018, new Companies Act provisions were introduced requiring companies to disclose in the Strategic Report of their Annual Report & Accounts (ARA) how they have had regard to the s172 Factors in fulfilling that duty under s172(1).
Who does it affect?
The requirements apply only to large companies (regardless of listing status). These are defined as companies who meet at least two of the following criteria:
- turnover over £36m;
- balance sheet total over £18m;
- more than 250 employees.
Subsidiaries which qualify as a large company will also need to report separately.
When does this come into effect?
The new requirements apply to financial years commencing 1 January 2019, so will affect accounts published
from 2020 onwards.
What do we have to do?
From 2020, large companies will need to include a s172(1) disclosure statement in the Strategic Report of their ARA describing how the directors have had regard to the s172 Factors when discharging their duty under s172. The s172(1) disclosure statement is also required to be freely accessible on the Company’s website if the Company is unquoted (note that AIM companies are classified as “unquoted” but will have their ARA on their website in any case).
Guidance from the Department of Business, Energy and Industrial Strategy in November 2018 suggests that companies should consider three core pillars in making the s172(1) disclosure statement:
- The issues, factors and stakeholders the directors consider relevant in complying with s172(1) (a) to (f)
(see Appendix below) and how they have formed that opinion;
- The main methods the 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 and strategies during the financial
FRC guidance states that: “the Section 172(1) Statement should focus on matters that are of strategic importance to the Company. The level of information disclosed should be consistent with the size and complexity of the business.”
Failure to comply with the requirements of the Companies Act in relation to the content of the Strategic Report can ultimately (where there was knowledge, recklessness or failure to take reasonable steps to secure compliance or prevent approval of the Strategic Report) result in directors being convicted of an offence and the imposition of a fine. Failure to comply with the website disclosure requirement is an offence by every officer of the Company in default and conviction can result in a £1,000 fine against the relevant individual.
We recommend that Boards of affected companies start preparing for this new disclosure requirement now and consider documenting the consideration of specific s172 Factors that are relevant to their key decisions. S172 Factors will be considered routinely by most businesses and directors as a matter of good practice and common sense, but the new reporting requirement means that these thought processes will now need to be condensed to prose and communicated to shareholders in the Strategic Report. Boards who are unable to demonstrate appropriate thought processes and consideration of the wider consequences of their decisions may find themselves perceived negatively by stakeholders and potential investors.
Should you require assistance getting to grips with this new disclosure requirement, please contact us at email@example.com, firstname.lastname@example.org or email@example.com.
Appendix: relevant legislation
Section 172(1), Companies Act 2006
Duty to promote the success of the company
- A director of a company must 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—
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 maintaining a reputation for high standards of business conduct, and
f. the need to act fairly as between members of the company.
Section 414CZA, Companies Act 2006 (inserted by the Companies (Miscellaneous Reporting) Regulations 2018)
A strategic report for a financial year of a company must include a statement (a “section 172(1) statement”) which describes how the directors have had regard to the matters set out in section 172(1)(a) to (f) when performing their duty under section 172.