Large companies – both public and private – will need to add an additional directors’ statement to their reporting for periods commencing 1 January 2019.
Large companies – both public and private – will need to add an additional directors’ statement to their reporting for periods commencing 1 January 2019. The new ‘section 172’ statement covers the exercise of directors’ duties throughout the year, so companies need to think now about what processes should be put in place to support their first statement.
The statement must address how the directors have had regard to the matters in section 172 in performing their duty to promote the success of the company for the benefit of shareholders as a whole. Broadly, this covers the directors’ consideration of the long term consequences of decisions, matters affecting the company’s employee and other stakeholder relationships, and the need to act fairly between members of the company.
What to cover, and the processes to support this
Statements should cover situations where the board’s decisions involve balancing the competing needs of different stakeholders; the maintenance of an effective culture to support effective decision making within the business; and capital allocation decisions, including in relation to dividend policy. Of course, boards are already taking account of section 172 factors in their decision-making, but these are potentially sensitive disclosures. Companies’ ability to support a full description of the steps taken will be important.
Boards will need to explain the issues, factors and stakeholders the directors consider relevant in complying with section 172, and how they have formed that opinion –i.e. how they have identified the relationships that drive the long term success of the business. They will need to explain the main methods the directors have used to engage with stakeholders and understand the issues they must have regard to. Many companies will already have stakeholder consultation procedures, but are they being consistently applied across stakeholder groups?
Statements will also need to provide information on the effect of the Directors’ regard for their responsibilities under section 172 on the company’s decisions and strategies during the financial year. Companies should already be covering the longer term aspects of their strategy and performance in their strategic reports, but a more formalised process to track these activities ahead of the start of the first section 172 reporting period may be needed.
Reporting by subsidiary companies
For subsidiary companies required to prepare a section 172 statement there is an additional consideration. Some of the matters and processes supporting the parent company’s statement may well be relevant to the subsidiary, but it is unlikely that they will be identical. The statement must be made from the perspective of the subsidiary, and cover the processes and considerations applied by the company’s directors, not its parent.