Guidance on Preparing a Section 172 Statement

The Companies Act 2006 introduced Section 172 which requires company directors to consider the interests of various stakeholders, including shareholders, employees, customers, suppliers, and the environment. Directors must make decisions that are in the best interest of the company as a whole and not just to benefit one group or individual.

Preparing a Section 172 (s.172) statement can be a complex process, as it requires careful consideration of all stakeholders involved. At ESG Pro, we help businesses prepare a Section 172 statement, and here we look at the three key themes required: understanding Section 172 obligations, factors to consider in preparing the statement and best practices for communicating impact of decision-making.

The first explores what is meant by Section 172 obligations and why they are important for companies to comply with. The second delves into the factors that need to be considered when preparing a Section 172 statement such as identifying stakeholders, evaluating their interests, and considering potential conflicts between them. Lastly, we offer insights into how best practices can be used to communicate the impact of decision-making on all stakeholders.

By addressing these three topics in greater detail, you’ll see the value of having our guidance in preparing an effective Section 172 statement that meets legal requirements while also ensuring that all stakeholder interests are considered during decision-making processes.

Understanding your Section 172 obligations

Section 172 of the Companies Act 2006 places a legal obligation on directors to promote the success of the company for the benefit of its shareholders. However, this obligation is not limited to just shareholders. The section also requires directors to take into account the interests of other stakeholders, such as employees, customers, suppliers, and the environment. Understanding these obligations is crucial in preparing a Section 172 statement that accurately reflects the company’s values and priorities.

To fulfil their Section 172 obligations, directors must first identify who their stakeholders are and what their interests are. This involves conducting stakeholder mapping exercises (a Materiality Assessment) and engaging with stakeholders through various channels such as surveys, focus groups, or one-on-one meetings. By understanding what matters most to each stakeholder group, directors can make informed decisions that balance competing interests and prioritise long-term sustainability over short-term gains.

Once stakeholders have been identified and their interests understood, directors must consider how these interests can be integrated into the company’s decision-making processes. This means taking a holistic approach to strategy development that considers all aspects of the business – from financial performance to social impact – and aligning them with stakeholder expectations.

Directors must also ensure that they have adequate mechanisms in place for monitoring and reporting on their Section 172 obligations. This includes setting up appropriate governance structures such as board committees or advisory panels that provide oversight on key strategic decisions. It also involves developing robust reporting frameworks that track progress against key performance indicators (KPIs) related to stakeholder engagement.

Finally, it is important for companies to communicate their Section 172 commitments clearly and transparently to all stakeholders. This includes publishing a Section 172 statement on your website and ensuring that it outlines how the directors intend to meet their obligations under the Act and how they will measure progress against KPIs over time.

Understanding Section 172 obligations is essential in preparing an effective Section 172 statement that accurately reflects a company’s values and priorities. By identifying and engaging with stakeholders, integrating stakeholder interests into decision-making processes, monitoring progress against KPIs, and communicating commitments transparently, directors can promote the long-term success of their company while also fulfilling their legal obligations.

Preparing s.172 – 5 factors

When preparing a Section 172 statement, there are several factors that companies must consider.

1. Firstly, it is important to identify the key stakeholders and their interests in the company’s operations through a rigorous materiality assessment. This may include shareholders, employees, customers, suppliers, and the wider community. By understanding these stakeholder groups and their priorities, companies can tailor their Section 172 statement to address their concerns.
2. Secondly, companies must consider the impact of their decisions on the environment and society as a whole. This includes assessing the environmental footprint of their operations and considering how they can reduce any negative impacts. Companies must also consider social issues such as human rights violations and labour practices when making decisions.
3. Thirdly, companies must ensure that they are complying with all relevant laws and regulations. This includes not only legal requirements, but also ethical standards set out by industry bodies or international organisations.
4. Fourthly, companies should consider any potential risks associated with their decisions. These could include financial risks such as loss of revenue or reputational risks such as damage to brand image or loss of customer trust.
5. Finally, companies should be transparent about their decision-making processes and provide clear justifications for why certain actions were taken. This helps to build trust with stakeholders and demonstrate that the company is acting in an ethical manner.

In addition to these factors, it is important for companies to regularly review and update their Section 172 statement. As stakeholder priorities evolve and new risks emerge, companies need to ensure that they are addressing these issues in a timely manner.

Overall, there are many factors that companies must consider when preparing a Section 172 statement. By taking into account stakeholder interests, environmental and social impacts, legal requirements and ethical standards, potential risks, and transparency in decision-making processes; businesses can create a comprehensive report that demonstrates responsible corporate behaviour while promoting long-term sustainability for all involved parties.

Communicating the impact of decision-making

One of the most critical aspects of preparing a Section 172 statement is communicating the impact of decision-making. Best practices for communicating this impact include transparency, clarity, and consistency. Transparency involves being open and honest about the potential consequences of decisions made by the company. This can be achieved by providing detailed information about the decision-making process and how it was arrived at.

Prioritise clarity

Clarity is essential for ensuring that stakeholders understand what the company is doing and why it is doing it. Clear communication helps to build trust and credibility with stakeholders, which can be invaluable in securing their support for future decisions.

Use consistent messaging

Consistency is also crucial when communicating the impact of decision-making. Companies should ensure that they are using consistent language and messaging across all communications channels. This includes everything from press releases to social media posts to annual reports. Consistency helps to reinforce key messages and ensures that stakeholders have a clear understanding of what the company stands for.

Remember to use data and visual aids

Another best practice for communicating impact is to use data wherever possible. Data can help to provide concrete evidence of the impact that decisions are having on stakeholders, whether positive or negative. For example, a company may use data to show how its decision to reduce carbon emissions has led to a reduction in air pollution levels in local communities.

Finally, companies should consider using visual aids such as infographics or videos when communicating impact. Visual aids can be particularly effective in helping stakeholders understand complex issues or data sets quickly and easily.

Best practises

There are several best practices that companies should follow when communicating the impact of decision-making in their Section 172 statements. These include transparency, clarity, consistency, using data wherever possible, and using visual aids where appropriate. By following these best practices, companies can build trust with their stakeholders and demonstrate their commitment to making responsible decisions that benefit both society and shareholders alike.

Conclusion

In conclusion, preparing a Section 172 statement is an essential aspect of corporate governance that requires careful consideration and attention to detail. Understanding the obligations outlined in Section 172 of the Companies Act 2006 is crucial for companies to fulfil their legal responsibilities and maintain transparency with stakeholders.

Factors such as stakeholder engagement, long-term sustainability, and ethical considerations must be considered when preparing the statement. Best practices for communicating the impact of decision-making include clear language, concise explanations, and visual aids to enhance understanding.

Overall, companies must prioritise their duty to act in good faith and promote the success of their business while considering the interests of all stakeholders. By following guidance on preparing a Section 172 statement, companies can demonstrate their commitment to responsible corporate behaviour and build trust with stakeholders.