As a key and trusted provider of company secretarial subscriptions and related services here at London Registrars, we took much interest in the Financial Reporting Council (FRC)’s recent release – through its Financial Reporting Lab learning space – of advice on how companies can make their section 172 statements more useful.
More specifically, of course, this relates to section 172(1)(a) to (f) of the Companies Act 2006. We quote section 172 in a lot of the resolutions we draft for our clients, because the Act states that directors must make their decisions in the best interests of their company.
This is now statute law, having previously been covered by common law and part of the fiduciary duties directors had vis-a-vis their companies. But what are some of the most helpful tips that the FRC outlined with regard to such aspects of the section 172 statement as what content to include, how to present that content, and how to facilitate the process of the statement’s preparation?
First of all… why were section 172 statements introduced?
Section 172 statements were brought in by The Companies (Miscellaneous Reporting) Regulations 2018, to be first applied to the reporting periods of relevant companies for financial periods commencing on or after 1 January 2019. The FRC then issued a clarification in May 2018 as to which companies ought to prepare such statements.
The introduction of these requirements was driven by a wish to maximise insight and accountability, in light of concerns that boards were failing to pay enough attention to their responsibilities towards both shareholders and stakeholders.
In the words of the UK Corporate Governance Code: “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.”
What are some of the tips the FRC has outlined?
The following are just some examples of the advice the regulator has laid out for companies looking to compose more effective and useful section 172 statements:
- Start early. Companies are urged not to simply compile relevant information for their section 172 statement at the end of each year, but to highlight the key decisions and engagement activities that may be worthy of inclusion in the statement as they take place, over the course of the year.
- Be specific and genuine, instead of simply ‘box-ticking’. The FRC has also called for firms to not treat the section 172 statement as a mere compliance exercise. The statement should not just duplicate the section 172 requirements and state compliance; instead, the focus ought to be on how the company fulfilled those requirements, what happened during the year, and – where applicable – what the board and management’s intended future actions are.
- Explain the ‘why’. Also included in the regulatory body’s tips was the importance of setting out the board’s reasoning on why particular stakeholders are identified as key, why given engagement methods were effective, and why certain decisions were taken in light of engagement and feedback that may have accumulated over time.
- Consider the statement’s flow and context. In accordance with the regulations, a section 172 statement must be included within the Strategic Report, or elsewhere by cross reference. The statement should reflect the link to the organisation’s strategy, in addition to being clear about the board’s role. Companies are also encouraged to think about how the statement fits into the context of stakeholder engagement.
- Make the statement visible. The FRC has also said each company’s section 172 statement should be clearly labelled and referred to in the annual report’s contents page.
During these testing times, London Registrars remains by your side
If you would appreciate further tailored advice, guidance and assistance in relation to various elements of your corporate governance and compliance practices, we are available here at London Registrars to serve those needs – including through the provision of company secretarial subscriptions.
Reach out to us now by calling 020 7608 0011 or 07415 107436, or sending us an email, and we will be both pleased and well-placed to help you with your query.