Governance #4: UK Company Directors' duties. Telling it how it is.
Until 2006 directors’ duties in the UK were largely enshrined in Common Law. The 2006 Companies Act brought these under statute for the first time and they have remained unchanged since then. As a reminder, Section 172 of the Act sets out directors’ duty to promote the success of the company as follows:
(1) 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, and
f. the need to act fairly as between members of the company.
It is fair to say that until recently these considerations had slipped well down the order of priorities for many boards, often only being consciously considered during induction training and annual board evaluation. This priority has now changed as the searchlight on good corporate governance concentrates focus on the performance of organisations particularly on matters such as treatment of employees and engagement with stakeholders as society, including investors, consumers and pressure groups focus on greater sustainability and ESG.
What’s changed since 2019 – An obligation to disclose performance
The Companies (Miscellaneous Reporting) Regulations 2018 came into effect from January 2019 and require various levels of reporting on disclosure. While the requirements are targeted by company size these do not limit the duties of directors in smaller companies to be able to evidence performance if called upon. It impacts on annual reports published in 2020. The Regulations make the following provisions:
For companies required to prepare a strategic report (except ‘medium’ companies):
The strategic report must include a statement describing how the directors have complied with S172(1) (a) to (f);
The directors report must include a statement summarising how directors have engaged with employees and taken account of their interests.
For companies and groups of companies with over 250 UK employees
The directors report must include a statement summarising how directors have engaged with suppliers, customers, and others in busines relationships with the company.
For companies with over 2500 global employees or turnover over £200 million & balance sheet over £2 billion globally (with exceptions for listed companies, CIC’s and Charities)
The directors report must include a statement about the corporate governance arrangements applied by the company.
For UK Incorporated ‘Quoted’ companies with over 250 UK employees (excludes AIM listed)
The directors’ remuneration report must include the ratio of CEO’s remuneration to median, 25th and 75th quartile pay remuneration of UK employees, and
Illustrate the effect of future share price increases in executive pay outcomes
In addition, the revised UK Corporate Governance Code (2018) contains similar reporting requirements.
Useful Steps in Evidencing s.172 Compliance
Ensure awareness by the directors of their duties.
Ensure the duties can be addressed appropriately by board and each director and implement any changes to allow this to happen.
Ensure that a clear purpose, culture and values have been established and communicated by the board.
The Strategic Report explains ‘how’ duties have been met not just ‘they have been’ met.
That how the duties have been met can be evidenced i.e. such as in meeting minutes.
The strategic matters, risks and opportunities to be disclosed in the strategic report to evidence directors compliance are identified and agreed.
The impact of information disclosed elsewhere that evidences or contradicts compliance with duties.
Governex is an ESG advisory business that helps businesses with corporate governance as well as answering the question of how they make positive contribution to the environment and social issues.
We help organisations implement the right shift in focus from a purely financial commitment to include environmental, social and governance commitments. All in the context of meeting business purpose, strategy, integrity and diversity.
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