The new ‘Section 172′ – what do Director’s need to know?

What does section 172 require?

A director of a company is required under the provision of Section 172 of the Companies At 2006 to promote the success of the company for the benefit of its shareholders as a whole. In doing so, one of the requirements that it will need to take into account is the impact of the company’s operations on the community and the environment.  This provision is known as the ‘enhanced shareholder value’ provision. A board should provide information in its strategic report to enable shareholders to assess how directors have performed their duties.

Revisions have been made to the UK Corporate Governance Code which is applicable to all listed companies  and  secondary legislation has been introduced in relation to section 172  requiring ‘  all companies of a significant size (private as well as public) to explain by setting out in a statement in its strategic report how their directors comply with the requirements of section 172 of the Companies Act 2006, with regard to the impact of the company’s operations on the community and the environment and the need to foster the company’s relationships with suppliers, customers and others’.

This will place a stronger duty on directors to ensure greater transparency in relation to human rights and environmental impacts that could affect the company.

What are the section 172 Statement’s requirements?

• They statement must be made in a company’s strategic report for a financial year.
• It must be made available on the website.
• It must be maintained by the company and identify the company in question.
• No guidance is given on the format.

Additional reforms: statement in the Directors report

In addition to the statement to be set out in the strategic report , a statement must be made in the directors report setting out how the directors have regard to  employee interests and the need to foster the company’s relationships with suppliers, customers and others’

What companies are covered?

Quoted companies, and  large companies (including large private companies ) have to adhere to the requirement to publish the statement and also to report on their business relationships with suppliers.

When do the reporting requirements come into effect?

The regulations come into force on 1 January 2019.

Practical steps to take to discharge the section 172 duty:

1. Set the strategy
2. Training – including refresher course on duties appropriate to extend the skills of company’s managers and others
3. Information – ensure appropriate and relevant information is provided.
4. Policies and processes- ensure relevant stakeholder factors are considered when setting policies at board level. Ensure that specific policies are implemented allocating responsibility to appropriate managers
5. Subsidiary companies – ensure directors know they owe a duty to the subsidiary and not the parent company
6. Engage with stakeholders

See  GC100 guide “Guidance on Director’s Duties: sect 172 and stakeholder considerations’ for more detail.

There is no doubt that the need to report on the business relationships with suppliers, customers and others and the impact on the business, companies are going to have to give consideration to how they ensure they are managing their environmental and human rights impacts and modern slavery risk.

How can Ardea International help?

We provide specialist advise on environmental, human rights and business issues, including modern slavery , harnessing our legal expertise. If you would like to discuss these issues and how they might affect your business, please contact Colleen Theron: colleen.theron@ardeainternational.com