Strategic Report s172 Duty CA2006
Large companies must explain, in their Strategic Reports, how their directors have fulfilled their section 172, Companies Act 2006 duty to promote the success if the company.
Compliance with this requirement is proving challenging for many board directors. As “how” is much more difficult to explain than “if”. A simple “Yes” would not satisfy this new legal requirement.
The company’s justification for the “How” in the Strategic Report might give rise to challenges from the stakeholders, especially employees and shareholders. If challenged publicly, the ensuing controversy could cause significant damage to corporate brands and reputations.
s172 CA2006 Requirement
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 to the:
- Consequences of any decision in the long term
- Interests of all of the stakeholders, not just the shareholders
Assuming that all companies were already complying with s172 CA2006, this should not require any new processes or work. It should simply require new methods to measure and collect evidence of what is already being done.
This is supported by Provision 5 of the UK Corporate Governance Code
“The board should understand the views of the company’s other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.”
Directors must also explain in their directors report; how they have fostered relations with their suppliers, customers and others, as well the effects of that regard for those stakeholders on their decisions.
Thresholds for Large Companies or Groups are any two of:
- Annual turnover of more than £36 million
- Gross balance sheet assets of more than £18 million
- More than 250 employees.
Our course covers this and other key topics in more detail
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