Many directors of companies within the housing sector will be asked, for the first time, to prepare “section 172 statements” confirming their compliance with the statutory “section 172 duties”.
Although section 172 of the Companies Act 2006 was one of the most hotly debated aspects of the changes (well maybe only within legal and governance circles) enacted in 2007, it is fair to say that its impact has not lived up to the hype. This could be about to change!
What is section 172?
Section 172 imposes a statutory duty on company directors to act in a manner which promotes the success of the company for the benefit of its members whilst having regard to a number of factors including the longterm consequences of their decisions and the interests of a range of stakeholders (such as employees, customers, suppliers, the community and environment ).
The purpose of the section 172 is to encourage company directors to take into consideration the wider impact of their decisions beyond the traditional emphasis on financial performance. How should directors balance the “success” of their company against the often conflicting interests of wider stakeholders? With no external enforcement or reporting obligations, over time this new duty slipped down (and off) boards’ agendas.
What has changed?
As a result of new regulations, certain companies are now required to make a statement on how the directors have met their section 172 obligations as part of their annual strategic report for financial years starting on or after 1 January 2019. The statement must also be published online. We are now starting to see the publication of the first section 172 statements and for those across the sector currently preparing annual reports, directors’ attention will be focused on their section 172 duties.
Who must publish section 172 statements?
Those companies who are already required to produce a strategic report will be now required to also report on their directors’ compliance with section 172. Such companies will meet two of the following three criteria:
- Turnover above £36 million
- Balance sheet assets above £18 million
- More than 250 employees
There are a number of other companies who may not meet those thresholds but who will still fall within the new reporting requirements. These include (for example) public companies (whether listed or not) or any company within a group which contains an entity which has securities (such as bonds) admitted to trading on a regulated market.
A number of housing groups in the sector will be caught be this new reporting requirement, either as a company which meets the criteria itself or because its group contains a PLC or has listed securities.
What should be included in a section 172 statement?
Guidance published by BEIS and FRC suggest that a simple statement of compliance is unlikely to be sufficient to meet the statutory requirement. Section 172 statements should include an appropriate level of detail sufficient to show:
- The issues, factors and stakeholders considered relevant in complying with section 172
- The methods used by the company to engage with stakeholders
- The effect this had on the company’s decisions and strategies during the year
How to prepare?
Directors should ensure that the principles of section 172 are reflected in the company’s strategy and built into the culture of the company. This can be supported by policies and procedures which ensure wider stakeholder engagement and an express strategy to engage with stakeholders.