There’s much at stake: Reporting on employees, customers and suppliers under Section 172 for 2019 year-ends

The requirements for listed companies to manage their businesses and report on the outputs to, and relationships with, a broader group of stakeholders than just shareholders have been growing for some time.  Here we consider the ‘Section 172’ change that affects both listed and a broad range of private companies.

We note, with interest, Sir Donald Brydon’s recommendation in this report[1] that auditors should have a specific responsibility in relation to Section 172 reporting which will, if implemented raise the profile of this new Section 172 statement significantly and may raise expectations of rigour somewhat in this first year too.

What’s required under Section 172(1)?

Directors of UK companies have had, since the 2006 Companies Act, a duty to promote the success of the company while having regard to:

a)       the consequence of decisions in the long term;

b)      the interests of employees;

c)       the company’s business relationships with suppliers, customers and others;

d)      the impact of the company’s operations on the community and environment;

e)      the desirability of maintaining a reputation for high standards of business conduct; and

f)       the need to act fairly between members of the company.

While the consideration of this duty may have been implicit in many decisions, there was no specific duty to report on it.  The snappily titled “The Companies (Miscellaneous Reporting) Regulations 2018” are effective for the first-time this year for companies with a calendar 2019 year-end and require a specific statement on this duty; a ‘Section 172(1) statement’, in the strategic report. 

The Section 172(1) statement must explain how directors have fulfilled their duty rather than what the company has done.  There are no mandated content elements within the statement, but the Financial Reporting Council (“FRC”)’s guidance[2] suggests that an appropriate approach would be to identify key stakeholders, describe the interaction that the company has had with those stakeholders during the year and then explain how that interaction has influenced key decisions taken during the period.  This contrasts with the strategic report requirements which focus more on the impact of the company’s activities on those stakeholders.  

Who is it applicable to?

This requirement to report applies to all “large” companies (i.e. those meeting two out of the three following thresholds: more than 250 employees; turnover of more than £36m; or a gross balance sheet in excess of £18m) and includes even wholly-owned subsidiaries.  It is also worth noting that the requirement applies at the level of the company not the group.  Subsidiaries cannot, therefore, simply refer to a statement in their parent company’s accounts.  For parent companies, though, there is no requirement for a consolidated Section 172(1) statement; but having regard to the value of investments in subsidiaries should effectively require this.   

Conclusions

This new requirement, combined with the FRC’s recent update to the strategic report guidance, the non-financial information statement for public interest and traded entities with more than 500 employees, and additional obligations to report on relationships with employees and with “suppliers, customers and others” contained in The Companies (Miscellaneous Reporting) Regulations 2018, add substantially to the requirements for reporting on a wider group of stakeholders.  Additionally, the letter published from the FRC to Greg Clarke early this year, on the FRC’s remit, makes it clear that the FRC considers reporting on Section 172 important and not just a minor administrative issue and Sir Donald Brydon’s interest adds further to its importance.

Find out more

If you are interested in discussing how your company might approach the new requirements and integrate them with existing reporting, please contact Andrew Jones.

For more information about Section 172 reporting, please also refer to our technical publication: Section 172 Reporting – Understanding what is required and preparing to meet the requirements.

[1] Assess, assure and inform – Improving audit quality and effectiveness: Report of the independent review into the quality and effectiveness of audit, by Sir Donald Brydon (December 2019)

[2] FRC’s Guidance on the Strategic Report (July 2018)