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FRC Lab publishes report on reporting on stakeholders, decisions and Section 172 statements

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21 Jul 2021

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published its latest report on reporting on stakeholders, decisions and Section 172 statements.

The report highlights the increasing calls for better information on how companies are having regard for their stakeholders and how key decisions have taken their perspectives into account.  It emphasises that investors are ultimately focused on how a company is progressing towards fulfilling its purpose and achieving long-term success noting that information on stakeholders and on decisions can help with that understanding.  With consideration of stakeholders and consequences of decisions being part of the Section 172 duty, the report indicates that the Section 172 statement can be a helpful bridge between the two types of information.  The report sets out what investors are looking for in reporting on these areas and how companies can improve their reporting to better meet their needs.  The report is divided into three sections:

Information on stakeholders 

In the first section, the report highlights that investors view information on a company’s key stakeholders as critical to understanding the company and its prospects. It outlines how investors want to see information on stakeholders’ relevance to the business model and strategy, the strength of stakeholder relationships, risks and opportunities, and performance and metrics. 

In particular, investors want companies to set out clearly:

  • who are the stakeholders relevant to a company’s success and how they influence the operation of the business model and delivery of strategy.  This would include information on:
    • who the key stakeholders are;
    • why they are important including how the strategy and business model depend on them, how they have been considered strategically and what value is created through the stakeholder relationship; and 
    • what is important to the company's stakeholders.
  • how the company builds and maintains strong relationships with its stakeholders and understands their interests, needs and concerns to enable it to pursue long-term success.  This would include information on:
    • the actions the company is taking to build and maintain strong relationships with its key stakeholders;
    • the board's role in engagement as well as information the board receives about stakeholders and engagement; and
    • the feedback received and the outcomes of engagement.
  • what could affect the company’s relationships with its stakeholders and how these relationships could affect the company’s pursuit of success.  This would include information on:
    • market factors and trends or regulatory changes that have affected or could affect the company’s key stakeholders;
    • the risks that could affect key stakeholders and the company’s relationship with them, as well as the risks that the stakeholder relationships give rise to;
    • the mitigating actions taken to address these risks; and
    • the opportunities arising from key stakeholders which the company is considering strategically.
  • what is measured, monitored and managed in relation to stakeholders, to understand the strength of a company’s relationships with its stakeholders and how they are contributing to the company’s success.  This would include information on:
    • metrics used by managment and the board to monitor and assess stakeholder relationships;
    • prior-years’ comparatives, targets and industry benchmarks to allow trend analysis; and
    • explanations of what affected the performance, whether a trend is likely to continue, and related actions to address performance issues.

Information on decisions

In the second section, the report highlights that investors want to know what the strategic decisions were during the period, how such decisions were made, including how stakeholders were considered in reaching them, the difficulties encountered, and the outcomes of these decisions.

In particular, investors want companies to set out clearly the significant decisions taken during the year and how they link to the company’s purpose and strategic priorities, and for each significant decision:

  • how the board or management reached the decision, including information used to back it up and any long-term considerations;
  • how stakeholders were considered in reaching the decision, including consideration of feedback and engagement activities, and the impacts of the decision on different stakeholders;
  • the difficulties or challenges in making the decision, including how different stakeholder needs or concerns are balanced, and any short-term negative consequences which are offset by long-term benefits; and
  • the expected and/or actual outcomes of the decision, including how they are reflected in current performance and metrics, and the long-term implications on the company.

Section 172 statements

The third section addresses better practice Section 172 statements.  It highlights that the statements are not just about stakeholder engagement, but should reflect all aspects of the Section 172 duty to allow a better understanding of how a company is progressing in its pursuit of its purpose and long-term success. 

Investors indicate that more useful Section 172 statements:

  • do not only focus on stakeholder engagement, but consider the other aspects of Section 172;
  • discuss principal decisions (linking to the long-term success of the company) and how stakeholders and other factors were considered in making those decisions;
  • bridge information on stakeholders and decisions by considering them in a two-way approach, and incorporate both in the statement even if by cross-referencing;
  • can be a standalone source of information which is still concise if cross-referencing is used well; and
  • fit into a connected narrative linking to business model, strategy and how business is done (through consideration of governance and culture), demonstrating how the company is progressing in its pursuit of its purpose and long-term success.

Each section includes examples of current reporting practice to illustrate possible helpful ways of addressing some the aspects highlighted by investors.  The report builds on the tips on Section 172 statements report published in October 2020.  

The Financial Reporting Lab has also published a summary of the questions for companies to consider in determining what information to report on stakeholders and decisions which meets investors’ needs.  A podcast is also available which discusses the importance of linking information on stakeholders and decisions to strategy and the long-term success of the company.

The press release, report, and a podcast are available on the FRC website. 

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