On 23 October, the GC1001 published its long awaited "Guidance on Directors' Duties - Section 172 and Stakeholder Considerations" (the "2018 Guidance"). This has been produced in response to the Government's request (back in August 2017 as part of its wider corporate governance reforms) for it to publish new advice and guidance on the practical interpretation of the directors' duties in section 172 of the Companies Act 2006 ("s172"). Many will be relieved that it supplements (rather than replaces) the GC100's existing, and well respected, Guidance Note on Directors' Duties published back in February 2007 (the "2007 Guidance").

Along with the 2007 Guidance and section 82 of the FRC's new Guidance on the Strategic Report (the "FRC Guidance") published in July, the 2018 Guidance will be of interest to both:

  • premium listed companies considering how to comply with new Provision 5 of the 2018 Corporate Governance Code (which requires relevant companies to describe in their annual report how the views of key stakeholders and the matters in s172 have been considered in board discussions and board decision making); and
  • UK companies that qualify as large UK companies3 and which will therefore need to include a s172 statement in their annual report (which describes how the directors have had regard to the matters set out in s172(1)(a) to (f) when performing their duty under s172),

in each case with relevant reporting obligations applying to financial years beginning on or after 1 January 2019.

This alert is intended to help piece together the s172 compliance and reporting jigsaw by: (i) recapping the key points from the 2007 Guidance; (ii) summarising key takeaways from the 2018 Guidance; and (iii) highlighting the additional s172 reporting recommendations from the FRC Guidance. It concludes by listing out a number of practical steps companies can be taking now to prepare for future s172 reporting.

A reminder about the 2007 Guidance

The 2007 Guidance contains useful advice on the practical steps that should be taken by boards and individual directors in order to comply with s172. It was drafted to address the significant concern about the impact of the introduction of the concept of "enlightened shareholder value" in s172 back in 2007. One of the key debates at the time was whether and, if so, to what extent, board packs and board minutes would need to refer to each of the six factors in s172. The 2007 Guidance confirms that:

  • it is best practice for those responsible for preparing board papers to ensure that any relevant factors (including, but not limited to, the six s172 factors) are properly considered whilst the board paper is being prepared. If necessary, relevant factors can be included in the paper, or in any presentation made to the board. Responsibility for considering relevant factors can be delegated to the members of the management team preparing the paper in the usual way;
  • board minutes only need to record the decisions reached. They do not need to provide detail on how each of the six factors was considered, or provide a negative statement where the factors were not relevant; and
  • where decisions are taken by way of a less formal process and there is no formal paper, or formal minute of a decision, that lack of formality should not lead to an inference that relevant factors have not been considered.

What are the key additional takeaways from the 2018 Guidance?

The 2018 Guidance is a 20 page document that is designed to provide practical help to directors in the performance of their s172 duty. It assumes that the relevant company is not in financial difficulties that would require directors to act in creditors' interests, or to consider those interests differently. It is prepared from the perspective of larger, publicly listed companies and their UK subsidiaries, but the GC100 hope that it will also provide useful insight and ideas to directors of all companies. It consists of:

  • an executive summary;
  • detailed suggestions of practical steps directors can take to comply with s172;
  • a summary of the legal background and aspects of s172; and
  • an example scenario of how directors in a specific business situation (in this case, a large, listed supermarket retailer scaling back a product line) could discharge their duties.

The executive summary provides a helpful paragraph summing up how directors should approach s172 in decision making:

"…your job is not to balance the interests of the company and those of other stakeholders. Instead, after weighing up all the relevant factors, ask yourself which course of action you consider best leads to the success of the company. having regard to the long term. This can sometimes mean that certain stakeholders are adversely affected, but this does not call into question decisions made."4

Suggestions of practical steps directors can take to comply with s172

In contrast to the 2007 Guidance, which focuses on s172 in the context of board decision-making, the 2018 Guidance focuses on how directors can have regard to the s172 factors in everything that they do as directors, of which formal board decisions is a small part. It specifies five areas of focus to help directors embed s172 in decision making in the company, all of which are tied together by one over-arching theme, the company's "culture" (which is also a key theme from the new 2018 Corporate Governance Code).

Practical steps directors can take / things to consider include:

  1. Strategy: Reflect the s172 duty when setting and updating the company's strategy and considering risk issues. Consider who the company's stakeholders are, how they are identified, whether they should be disclosed (and, if so, to whom and why) and the appropriate engagement with them. If long term issues (for example, the impact on communities and environment) are important, are they given sufficient time and focus by board and management?
  2. Training: Directors should be provided with induction training, including on their duties and particularly s172, as well as refresher training on an ongoing basis. Consider what training is appropriate for management, and the directors and management of subsidiaries, bearing in mind the need for the board to have appropriate and relevant information in order to make informed judgments, management's role in information flows to the board, including writing effective board papers, and the need for them to understand the s172 duty in discharging their role.
  3. Information: Consider, and arrange to receive, the information necessary, both on appointment and on an ongoing basis, in order to carry out the role of director and to satisfy s172. Consider whether each director, and the board as a whole, has sufficient knowledge and / or input from others (where appropriate) about stakeholder interests and factors relevant to the company. Challenge current information flows to the board, where appropriate, and do not assume that the status quo is sufficient.
  4. Policies and Processes: This section is split into further subcategories, considering relevant issues at or concerning: (i) board level; (ii) management level; (iii) directors of UK subsidiaries; and (iv) directors of joint venture companies. Four key takeaways for directors include: (i) the s172 duty should be recognised in the board's terms of reference and, if appropriate, committee terms of reference; (ii) the s172 factors should be considered when setting board level policies, including the remuneration policy; (iii) directors should ensure that, whatever process is in place for developing board papers, stakeholder factors are addressed (where judged relevant) and appropriate input given to assess them; and (iv) whatever approach to board minutes the company adopts (whether they are brief or detailed, and whether, and in what detail, s172 factors are included, if at all), directors should make sure that it is followed consistently.
  5. Engaging with Stakeholders: In the context of s172, directors should consider that: (i) taking account of stakeholder interests will be less effective, or at least perceived as less effective, if it is not combined with appropriate engagement; and (ii) stakeholder engagement is not just a board level issue - boards should recognise that stakeholder engagement occurs on a day-to-day basis through stakeholders interacting directly with the business, and respond appropriately.

No specific guidance on reporting

Despite its length, the Guidance does not give guidance specifically targeted at how companies should be reporting against compliance with the s172 duty. The 2018 Guidance therefore does not address what would probably have been of greatest interest to most readers, particularly those considering how to comply with Provision 5 of the 2018 Corporate Governance Code (which requires boards to report on how the matters in s172 have been considered in board discussions and board decision making). For those seeking further guidance on how to report on s172, it is worth taking a look at section 8 of the FRC Guidance (discussed below).

What does the FRC Guidance say on s172 reporting?

The FRC Guidance acknowledges that each s172 statement will address the individual circumstances of the relevant company, but that companies will probably want to include information on some, or all, of the following:

  • the issues, factors and stakeholders the directors consider relevant in complying with s172, and why;
  • the main methods the directors have used to engage with stakeholders during the year; and
  • the effect of having regard to the s172 factors on the company's decisions and strategies during the year.

Issues, factors and stakeholders

Strategy, likely impact on the business and stakeholders in the long term, and principal risks

The FRC Guidance suggests that a s172 statement could provide information on how the long-term success of the company has been considered when setting the company strategy and making strategic decisions. This might include considering the long term impact of strategy: on (i) the interests of other stakeholders; (ii) the community and the environment; or (iii) other broader matters that may affect long term company performance. A review of the likely impact of strategy in the long term, and possible consequences, may form part of the company's risk management process. The FRC Guidance therefore encourages companies to consider the linkage between the principal risks disclosed in the Strategic Report and any disclosures made in the s172 statement.

Identifying key stakeholders

The FRC Guidance recommends that boards should identify the company's key stakeholders and the importance of those stakeholders to the long term success of the company. It acknowledges that a company's key stakeholders include those set out in s172, but also encourages companies to consider all relevant stakeholders in making their s172 statement, including pension schemes, pensioners and their entire workforce (i.e. not just those with a contract of employment with the company). Stakeholder relationships could be disclosed by way of a company stakeholder map that identifies the company's key stakeholder relationships and shows the dependencies of each part of the business on different groups of stakeholders, and the impact that the business has on each of these groups.

Engagement with key stakeholders

The FRC Guidance indicates that directors are likely to need to engage with stakeholders in order to gain the information necessary to make informed decisions having regard to stakeholder interests in accordance with s172. As part of the s172 disclosure, the FRC suggests that companies could describe how they engage with key stakeholders, and the outcomes of that engagement on the board's decision making. The FRC acknowledges that there may be some overlap between the s172 statement in the Strategic Report, and the new disclosures in the Directors' Report on: (i) employee engagement (for companies with over 250 UK employees); and (ii) engagement with suppliers, customers and others in a business relationship with the company.5 In order to avoid duplication, where the company deems the information prepared for the Directors' Report to be of strategic importance, the company should include this in the Strategic Report and incorporate it into the Directors' Report by cross reference. In these cases, it will not be possible to omit disclosure on employee or supplier engagement and impact on principal decisions in respect of impending developments, or matters in the course of negotiation, where the directors believe disclosure would be seriously prejudicial to the interests of the company (as would be possible in the Directors' Report). The FRC highlights this is because there is no equivalent exemption with regard to s172 disclosures.

Decision Making

Principal decisions

The FRC Guidance suggests that a s172 statement could identify the principal decisions taken by the board during the year (which should mirror those contained in the business review), set out how the board had regard to the matters set out in s172 when making those decisions, and the effect of that regard on those decisions. The FRC provides, as an example, a scenario where a board decides to exit a segment of the market which is no longer profitable. While the decision may still be taken to go ahead where the exit is critical to the long term success of the company, the s172 statement could reflect on how employee and the wider local community interests were taken into account and what the board did to mitigate any negative impact on those stakeholders.

Capital allocation and dividend policy

If the setting of the capital allocation and dividend policies are principal decisions (as they often are), the relevant company's s172 statement could explain how directors have had regard to the long term and interests of stakeholders, both in the setting of the polices, and in the subsequent application of the policies each year (for example, how these factors influenced the level of the dividend actually paid in respect of the relevant year).


Similar to the 2018 Guidance, the FRC Guidance observes that a company's culture can be a key way of demonstrating the status of the company's relationship with its stakeholders, its commitment to long term, sustainable success and, thereby, also demonstrate its directors' compliance with s172. It suggests that, as part of their s172 statement, companies could: (i) disclose information in relation to culture that the board has set in order to ensure that decisions are taken in line with the company's values and objectives; and / or (ii) explain the factors which the board considers are important to the company's reputation for high standards of business conduct, and the actions taken during the year to ensure its reputation is maintained.


The FRC Guidance provides a reminder that large subsidiaries in a much bigger group are still required to report on s172 compliance on a standalone basis, even where their parent will be reporting on a group basis.6 In those circumstances, it acknowledges that decisions and policies affecting key stakeholders (like employees) can be taken at a group level and that a parent company may disclose matters as they relate to the group as a whole, but it also emphasises that relevant subsidiaries should not, as a matter of course, make cross references to group disclosures and policies without also thinking about whether there are any company specific matters appropriate to disclose.


In a welcome move, the GC100 is not advocating a shift in approach towards s172 in board minutes and board papers. It will be a relief to many that they have confirmed that their 2007 Guidance still stands. However, they are encouraging directors to take a more holistic approach to s172, and to make sure that compliance with the duty and a consideration of relevant factors (which may go beyond the factors listed in s172) is embedded into everything that they do as a director. While the 2018 Guidance provides some helpful examples of things to be considered, and action that can be taken to achieve this, it is clear that the main focus in the 2018 Guidance is on large, publicly listed companies, who will already have sophisticated policies, processes and controls in place, and the necessary infrastructure to adjust these, if deemed necessary or appropriate. It will be a comparatively bigger task for smaller, private companies to rise to the challenge and consider how best they might adjust current practices to take account of the 2018 Guidance (if at all) in a proportionate way.

Practical steps companies can be taking now to prepare for future s172 reporting

  • Take a fresh look at culture: Consider compliance with s172, and how this will be articulated in forthcoming annual reports, in conjunction with an assessment of the company's broader culture. If the company has not publicly stated what its culture and values are, should it consider doing so now?
  • Consider stakeholders in strategy: If not already addressed, make sure that s172 is a standing item on the agenda when the board is setting the company strategy, and considering risk, and how this might be reported on in the future Strategic Reports.
  • Review board and management training: Review the training that directors and managers at group and subsidiary level receive, and whether any adjustments should be made, particularly bearing in mind s172 and the importance of adequate information flows to the board.
  • Identify and disclose key stakeholders and review current engagement: If not already clearly identified, consider at board level who the company's key stakeholders are, and the merits of publicly disclosing this via a stakeholder matrix (or otherwise) in the annual report, the current level of engagement and whether this should be amended or enhanced.
  • Review Policies and Processes. Consider whether a shift approach is justified and / or will make future s172 reporting simpler.
    • If the s172 duty is not already addressed in the board's terms of reference and committee terms of reference, consider amending these to address this.
    • Consider whether relevant stakeholder factors are appropriately reflected in board level policies, including the remuneration policy.
    • If not already in place, establish a consistent process for ensuring stakeholder interests are considered and addressed appropriately when decisions are taken at any level of the company / group. Consider how this will work in practice for all decisions (not just the principal decisions).
    • Establish a consistent approach to the preparation of board papers and board minutes, and, in particular, the approach to adopt towards compliance with s172. In doing so, consider what information the preparers of future annual reports will need in order to draft the s172 statement and the employee engagement and customer, supplier etc engagement statements, and how this will be verified. Also consider what information the directors might find helpful when approving those statements in future annual reports.
    • When preparing the 2018 annual report, consider including some voluntary disclosure around compliance with s172. In any event, consider what that disclosure might have looked like, and what additional information might be needed in order to prepare future annual reports.