s172 : A consideration for every UK Company Board
Updated: Jun 3, 2019
In the distant past, it was accepted that Directors ran companies for the benefit of their shareholders or, if they were approaching insolvency, the company's debtors but other stakeholders interests were very much subordinate. Not so today.
s172 of the Companies Act 2006 requires all directors to consider a range of stakeholder interests in their decision making.
The provision defines a duty to promote the success of the company, and imposes that a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term;
(b) the interests of the company’s employees;
(c) the need to foster the company’s business relationships with suppliers, customers and others;
(d) the impact of the company’s operations on the community and the environment;
(e) the desirability of the company maintaining a reputation for high standards of business conduct;
the need to act fairly as between members of the company.
This requirement has been with us for some years but it is not always clear how seriously some boards consider and balance those stakeholder interests. Recent cases suggest some boards have had scant regard to the interests of employees or pensioners.
What is new is the requirement on all companies that produce a Strategic Report to place a s172(1) compliance statement on their website explaining how they took account of the matters listed in s172 and to explain in the Directors' Report how they engaged with employees and what impact that had on decisions. For larger private companies , there is also a requirement to set out how they engaged with customers, suppliers and others with a business relationship with the company.
The new mantra is Comply AND Explain.
Robert Armour - March 2019