Shareholders, Stakeholders and Section 172(1) Reporting

Globally there is a healthy debate underway about the purpose of business with a detectable shift away from shareholder primacy. This has clear implications for Board accountability.

In both Search and Evaluation assignments Fidelio sees evidence of Boards and Executive Committees thinking very carefully about shareholder and stakeholder expectations, including the role of the leadership team when stakeholder and shareholder interests compete or collide.

Boards need to be able to exercise judgement and deal with extreme complexity at a time of extraordinary political, societal, technological and climate related change.

A recently introduced reporting requirement in the UK will shed a light on how Boards approach these deliberations, weighing up competing expectations for the business and navigating a path that goes beyond narrow shareholder value.

The New Requirement

The UK Companies (Miscellaneous Reporting) Regulations of 2018 included amendments to the 2006 Companies Act introducing the following requirement for financial reporting periods starting on or after January 1st 2019:

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 …….”

What Does Section 172(1) Say?

This matters because of the farsightedness of the Committee that drafted Section 172 well over a decade ago. It is easily forgotten that recent requirements in the 2018 Corporate Governance Code for Boards to take account of stakeholder interests find their origins in the 2006 Companies Act.

Section 172(1) takes a broad and long-term view of Board accountability (while admittedly harking back to a time when Boards were clearly predominantly male):

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—

  1. the likely consequences of any decision in the long term,

  2. the interests of the company’s employees,

  3. the need to foster the company’s business relationships with suppliers, customers and others,

  4. the impact of the company’s operations on the community and the environment,

  5. the desirability of the company maintaining a reputation for high standards of business conduct, and

  6. the need to act fairly as between members of the company.”

 

Who Reports?

The requirement will have a broad impact and applies to all but the smallest UK companies. The only companies to be excluded will meet two of the following criteria.

  • Turnover less than £36 million
  • Balance Sheet total less than £18 million
  • Fewer than 250 employees

What Will Section 172(1) Reporting Look Like?

This is a question that’s currently exercising Audit Committee Chairs.

The stakeholder universe in Section 172 is defined broadly and presciently includes climate change.

How will Board Members demonstrate that they have indeed had regard to the various constituents when performing their duty?

Of course, the answer could be boiler plate, but this would be a wasted opportunity at a time when anti-business sentiment is running high internationally. Indeed, in the UK a new regulator is taking shape that will have authority to sanction Board Directors, and not just those who happen to be chartered accountants.

The Implications

While significant in its own right Section 172(1) Reporting is also symptomatic of a much broader shift that is underway in the public, political and regulatory landscape, which Boards ignore at their peril. The increasing, complex and frequently onerous demands that are being made of public companies are unlikely to recede and the rise of ESG among leading investors creates an imperative for companies and their Boards to have a clear narrative and purpose.

Practically, Fidelio sees:

  • Board skill matrices extending to include the ability to think through stakeholder engagement in a structured and above all strategic manner
  • Board Evaluation exploring and reviewing the Board’s ability to oversee effective stakeholder and shareholder engagement, as well as the Board’s ability to adjudicate between competing stakeholder and shareholder interests.
  • Board Development, including “A Seat at the Table” preparing Board Directors to be alert to stakeholder concerns and open to effective engagement
  • Executive effectiveness with Boards ensuring a high degree of competence at the executive level to engage effectively with
    1. shareholders (IR  Director, Company Secretary)
    2. a broad range of stakeholders often critical to the success of the company (Corporate Affairs, HR, Government and Regulatory Affairs, Sustainability Directors)

Conclusion

For further information on how Fidelio Partners can support your Board with regard to shareholder and stakeholder engagement through Search, Evaluation or Development, contact Gillian Karran-Cumberlege on gkarrancumberlege@fideliopartners.com.

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