2 minute read 10 Sep 2019
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The Section 172 (1) statement: How companies can prepare

By

Maria Kępa

EY EMEIA Assurance Director

Director in EY's UK audit practice and corporate governance team. Experience working with clients in media, mining and other sectors in Europe, America and the Middle East. Mother of two.

2 minute read 10 Sep 2019
Related topics Assurance

As a result of the Companies (Miscellaneous Reporting) Regulations 2018 certain sized UK incorporated companies must include a separately identifiable Section 172(1) statement in their Strategic Report.

The statement explains how directors have had regard to the matters set out in Section 172(1)(a)-(f) of the Companies Act 2006, for financial years beginning on or after 1 January 2019.

MRR also introduced new requirements around disclosures relating to employee engagement and stakeholder interests which can be provided as part of the Section 172(1) statement.

What is Section 172?

Section 172 imposes a general duty on all company directors to act in the way they consider, in good faith, would be most likely to promote the company’s success for the benefit of its shareholders.

The purpose of the statement is not to provide a justification or rationale for every principal decision made by the board, but rather to explain how directors considered the matters within the section when reaching those decisions, including situations where boards may not have engaged on all applicable matters with affected stakeholders.

Read the full report.

Investors have confirmed that they see the new disclosure as one which can provide valuable insights and drive better engagement between a company and its investors

If companies don’t apply the spirit of MRR, and report in a boilerplate manner, there is a risk that additional regulatory and reporting requirements will be imposed in future.

Drafting the section 172(1) statement

Conversations with investors have confirmed that they see the new disclosure as one, which, if done well, can provide valuable insights and drive better engagement between a company and its investors.

The challenge facing companies is to provide meaningful reporting which is succinct and does not duplicate information already provided elsewhere, while bringing together all the relevant information in a separately identifiable statement.

 

Summary

Our report addresses this challenge by suggesting a practical framework designed to help boards preparing for the new disclosure requirement collate the required information and, if completed early, identify any potential gaps in stakeholder engagement. It is expected to be a useful starting point for drafting the section 172(1) statement.

The report brings together the relevant regulatory requirements and guidance applicable to premium listed companies, including practical examples which illustrate how decision-making can be influenced by stakeholder engagement, and covers the practical considerations for processes ahead of reporting.