Back in mid-2017, as part of its plans for improving the UK corporate governance framework, the government asked the GC100 to prepare practical guidance for directors on discharging their duty under section 172 of the Companies Act 2006. This new guidance, which aims to help drive improvements in the boardroom, has now been published.
What is the duty under section 172?
Section 172 imposes a general duty on every director to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole.
When considering what is most likely to promote the success of the company, directors must have regard to various matters designed to ensure that boards consider the broader implications of their decisions, not just for their shareholders but for a wider group of stakeholders. These matters are:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company.
The list is non-exhaustive and other relevant factors should be taken into account in the decision-making process.
What does the GC100 guidance say?
The new guidance gives a general explanation of the section 172 duty and the wider framework it sits in, including the link between good stakeholder engagement and a healthy corporate culture. The main focus of the guidance is to highlight five key things directors should consider to help embed the section 172 duty in their decision-making. The guidance then expands on each of the five focus areas with examples of practical steps directors could take to support compliance with their section 172 duties.
- Strategy – for example, in setting strategy and considering risk issues, directors should think about their overall duties and the stakeholder and other factors which will contribute to the company’s success or will be affected by its activities. Directors should consider how to assess which third parties are stakeholders and the appropriate engagement with them.
- Training – for example, suitable induction training should be provided to all new directors, including training on their section 172 and other duties, and refresher courses provided from time to time. Directors should consider what training on duties is appropriate for subsidiary directors and management.
- Information – for example, directors should think about information flows to the board, both those that support achieving success for the benefit of shareholders and those that support their consideration of the stakeholder factors under section 172. Directors should ask themselves whether they know enough about the stakeholder interests and factors relevant to the company. Where a director does not know all the relevant facts or have the expertise to make judgments with confidence, they should consider if they are receiving the right inputs from others.
- Policies and process – for example, directors should consider whether and how to ensure that relevant stakeholder factors are considered in setting policies at board level. More specifically, directors should consider whether and how stakeholder factors are addressed in board papers, if judged relevant, with appropriate inputs to assess them. At management level, directors should consider whether to provide training and guidance to managers on writing effective board papers to ensure that the impact of a proposed decision is clearly explained to directors.
- Engagement – the guidance does not replicate the new requirements on stakeholder engagement being introduced as part of the wider corporate governance reforms (see below) but provides some additional practical considerations for directors. For example, directors may wish to consider how stakeholder groups experience the company, its board and management, through day to day business interactions, as well as through any specific processes or channels established specifically for engagement. Directors may wish to consider the balance between collation of feedback, such as employee or customer surveys and complaints, and specific interactions with smaller groups of stakeholders.
The guidance stresses that a checklist approach to every board decision is not required and would not be workable in practice; the steps taken in relation to a particular decision will be for the directors to judge in the context of the company’s business and circumstances, and the importance and impact of the decision being taken.
How is section 172 relevant to the current corporate governance reforms?
Wider stakeholder engagement has been a key driver in the recent corporate governance reform discussions – it is seen as a crucial ingredient to a healthy corporate culture and confidence in UK businesses. As a result, the section 172 duty, and stakeholder engagement generally, has been thrown into the spotlight.
Related reforms (taking effect from 1 January 2019) include:
- Large companies (including large private companies) will be required to include a 'section 172 statement' in their strategic report describing how the directors have had regard to the matters in section 172.
- Large and medium-sized companies (including private companies) with more than 250 UK employees will be required to include a statement in their directors’ report explaining how the directors have engaged with employees, how they have had regard to employee interests and the effect of that on the business.
- Large companies (including large private companies) will be required to include a statement in their directors’ report explaining how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the impact of that on the business.
- The new UK Corporate Governance Code includes principles and provisions relating to stakeholder engagement. In particular, a provision stating that one or more of the following methods should be used in relation to engagement with the workforce: a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director. If the board has not chosen one or more of those methods it should explain what alternative arrangements are in place and why it considers that they are effective.