What is a Section 172 Statement?

The Companies Act is quite specific in its demand for “…a statement (a “section 172(1) statement”) which describes how the directors have had regard to the matters set out in section 172(1) (a) to (f) when performing their duty under section 172.” (see Companies Act 2006, s.414CZA).

The caution is simple: a mere confirmation that s.172 has been considered is inadequate. The directors must explain how they have executed their duties in accordance with the Act, and this means they should include details of the process or processes used by the board to ensure s.172 was addressed in their decision making in respect of matters of strategic importance.

Most large companies face ESG reporting within their TCFD and CSRD obligations, and these regulations centre on forward-looking climate modelling scenarios. Beyond strategic M&A discussions, as an example, it is sustainability in all its guises which now dominates boardroom discussions on strategy.

Directors are required to promote the success of the company for the benefit of the members as a whole in accordance with section 172 of the Companies Act. In doing so, they should have regard for (among other things) six specified areas that relate to the interests of wider stakeholder groups, which are as follows:

• the likely consequences of any decision in the long term;
• the interests of the company’s employees;
• the need to foster the company’s business relationships with suppliers, customers and others;
• the impact of the company’s operations on the community and the environment;
• the desirability of the company maintaining a reputation for high standards of business conduct; and
• the need to act fairly as between members of the company.

These six areas, which have been a part of the Companies Act since 2007, as well as the idea of reporting on them, are neither new nor novel because the strategic report’s main objective has always been to inform members of how the directors have carried out their responsibilities under Section 172.

However, instead of focusing specifically on the other facets of the directors’ responsibilities, strategic reports traditionally focused on the company’s performance in the current year, possibly with a brief mention of the following year, and describing principal risk. This is especially true for businesses that are exempt from the stricter “non-financial reporting” regulations that are applicable to quoted companies and large public interest entities.

In order to address the above, the introduction of the Section 172 Statement adds a new, explicit requirement for all large companies to describe how these six areas of broader stakeholder interests—which are listed in section 172(1)(a)–(f)—have been taken into account by the directors throughout the year. The focus on these issues reflects an understanding that the majority of them will directly affect a company’s long-term viability and prospects.

Within a company’s strategic report, the Section 172 Statement is required to be a distinct statement. Additionally, it needs to be posted on company’s website, or on that of its parent company if it does not have its own website, in which case it must identify clearly the name of the company to which it relates.

Because it is anticipated that this will be tailored to the company, the law itself does not specify the information or level of detail that must be included in the statement. However, general guidance from the Financial Reporting Council (FRC) and the Department for Business, Energy, and Industrial Strategy (BEIS) suggests that the Section 172 Statement should typically contain details on the following:

• The matters, things, and parties that the directors think are important for adhering to section 172(1)(a)-(f), along with their reasoning.
• The techniques the directors have employed to interact with stakeholders and comprehend the problems they must take into consideration.
• How those circumstances affected the company’s choices and strategies throughout the year.

As a result, it is unlikely that a straightforward declaration that the directors have complied with section 172 or a general outline of the governance procedures will be deemed sufficient to satisfy the legal requirement. In particular, the third bullet suggests that the statement should be updated yearly and should make reference to issues that have received board attention throughout the year.

To fulfil their section 172 obligations, directors must understand their stakeholder community. A stakeholder is any individual, group, or organisation that may be affected by or have an impact on a company’s decision, activities, or outcome.

The stakeholders of your organisation can include many diverse groups or individuals. They may influence, use, or benefit, or otherwise be impacted by your undertakings, or those who have special knowledge of the current situation, and those that will use, support, or maintain the final product or service.

By clustering stakeholders according to common needs, your list reduces to a more manageable length, increasing the efficiency and impact of your efforts to meet the right groups’ needs.

Your materiality assessment weighs the topics from a dual materiality standpoint, which recognises the difference between material topics of importance to your stakeholders vs. those of primary importance to the business. In the example materiality assessment published by Fresnillo, one can see the impact.

In this light, you can see that your stakeholders extend far beyond your management, employees, and investors, and extends through to those who:

• could be affected by your operations?
• could be affected by your marketing?
• could have an interest your success?
• might have a financial interest/stake?
• approves any sources of funding?
• sets the vision/goals?
• approves strategic changes?
• will use your end product?
• will service your end product?

Identify the important decisions that were made throughout the year. Which decisions had a significant impact on the company or a key stakeholder group during the year or will have a significant impact going forward? These are the choices we would anticipate the board to have carefully considered, and they are probably recorded in board minutes and papers.

• Determine the stakeholders most impacted by each important decision: Which stakeholders were or will be most impacted by each important decision? Keep in mind that not all significant decisions have an equal or equal degree of an impact on stakeholders.
• Consider how the important choices were made. How were the potential outcomes of a choice understood? What concrete steps were taken to ensure that the directors understood the perspectives of all relevant parties and how specifically did they take into account those stakeholders when making their decision? When a decision was made, did it take into account these issues? For instance, were any plans changed as a result of this process?
• Think about the decision’s longer-term effects – Some decisions may have different long- and short-term effects. How were the conflicting factors taken into account and balanced in this situation?

1. Be specific and avoid generalisations, especially in respect of referencing many subsidiaries or diverse stakeholder groups,
2. The report must be self-contained. Which it can reference and contain links to other reports, a valid Section 172 Statement should require no external reference to convey its substance,
3. Don’t waffle! What is strategically important to one corporation is mere noise to a much larger entity,
4. Cite case studies: examples of long-term decision-making are considered to offer valuable insight,
5. Be forward looking beyond the next financial year,

If a strategic report is approved by a company’s board and is later challenged for non-compliance with the Companies Act 2006 “every director who knew it did not comply (or was reckless as to whether it complied); and failed to take reasonable steps to secure compliance or prevent the report from being approved, commits an offence.”

Every officer of the company also commits an offence if the section 172 statement is not published on the website and kept available there for the specified periods, as described within the Companies Act.

As the GC100 state so perfectly, it’s all about driving cultural change:

“as the board seeks to determine or discuss the culture of your company, consider how you propose to embed in the habits and behaviours of board, management and employees a culture which, in its pursuit of success for the benefit of shareholders as a whole, is consistent with the company’s goals in relation to stakeholders, whether employees, customers, suppliers, local communities, the environment or others affected by or engaging with the company’s activities.”

At ESG PRO Limited, we assist you through the application of global frameworks which streamline your approach to Section 172 in such a way that addresses all of these criteria.