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The Bruce Column — making s172 more accessible

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05 Oct 2017

There has been growing pressure to make S172 of the Companies Act more effective in encouraging directors to explain how they have carried out their responsibilities and how the long-term sustainability of companies is achieved. Robert Bruce, our resident regular columnist takes a look at the latest developments.

Often the easiest way of bringing about change is to take an existing piece of legislation and reinvigorate its purpose. This is what is happening to S172 of the Companies Act. What the section says is that the duty of company directors requires them to act in a way that is most likely to promote the success of the company for the benefit of its members as a whole.

Earlier in the year the Financial Reporting Council suggested to the Government that this should be linked to the reputation and brand values of companies and so encourage directors and responsible shareholders to engage in a full consideration of these wider factors. And now the Government, through the thoughts of the Department for Business, Energy and Industrial Strategy, (BEIS), has agreed.

Originally S172 was about providing enough information to shareholders to assess how the directors had performed their duty to promote the success of their company. Now it expands it to how they have had regard to the matters set out in S172. They will have to provide, for example, details of how the matters have been actively considered and clearly minuted. But the fundamentals remain. The financial statements are prepared for a particular type of user, the investors, the providers of risk capital and credit, and the information has to be provided through that lens. It was clear from the majority of the respondents to the original BEIS paper that all this could be made to work more effectively through improved reporting and that change would be best achieved through the existing ‘comply or explain’ approach.

And this is what the Financial Reporting Council will be putting together as part of its review of the existing corporate governance code, due towards the end of the year. At present S172 says that it is about directors promoting the success of the company for the benefit of its members as a whole. It also says that directors should have regard for suppliers, customers, employees, and the likely consequences of any decision in the long-term. And the Government also expects the forthcoming reporting requirements to ‘explain how the company has identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has influenced decision-making in the boardroom’.

What the Government now hopes is that ‘a formal requirement [to report] will impel directors to think more carefully about how they are taking account of these wider matters’. The hope is that ‘more transparency will also help to reassure investors, creditors and others that companies are being run with a view to their long-term sustainability’. And there is another goal, a hoped-for knock-on effect. ‘Better reporting should improve the visibility of good boardroom practice’, the BEIS says, ‘allowing it to be replicated and adopted more widely’. The end result should be greater clarity all round.

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