17 września 2021 Wilma Rix Corporate Governance

Reporting on stakeholders, decisions and Section 172 – what are investors looking for?

The Financial Reporting Lab's latest publication considers company reporting on stakeholders, decision-making and Section 172 statements in relation to the Companies Act 2006.

To help companies improve their disclosures, the report sets out what investors are looking for in company reports and provides tips on approaching disclosures, as well as examples of helpful reporting on stakeholders, decision-making and Section 172 statements.

It reflects discussions between the Lab, companies and investors in response to the first Section 172 statements that were required to be published for the first time in 2020.

The report notes that investors are increasingly focused on information on stakeholders and board decision-making as it can help them understand how a company is fulfilling its purpose and achieving long-term success. With consideration of stakeholders and consequences of decisions being part of the Section 172 duty, the Section 172 statement can act as a bridge between the two.

Reporting on stakeholders

Investors are looking for clear disclosures of the following:

  • the stakeholders relevant to the company's success, and how they influence the operation of the business model and delivery of strategy;
  • how the company builds and maintains strong relationships with its stakeholders and understands their interests, needs and concerns;
  • what could affect the company's relationships with its stakeholders, and how these relationships could affect the company's pursuit of success; and
  • what is measured, monitored and managed in relation to stakeholders to understand the strength of the company's relationships with its stakeholders.

Decision-making

Investors are looking for an understanding of the following:

  • the principal decisions taken by the board and management and how they contribute to the company's success;
  • how and why the board and management reached those decisions;
  • how stakeholders were considered in those decisions;
  • the difficulties and challenges in making the decisions; and
  • the expected and/or actual outcomes of the decisions.

This section of the report also includes some helpful commentary on reporting on decisions by subsidiaries.

Section 172 statements

The reports favoured by investors:

  • do not focus solely on stakeholder engagement, but consider other aspects of Section 172, such as the likely consequences of decisions in the long term, the impact of the company's operations on the community and the desirability of maintaining high standards of business conduct;
  • discuss principal decisions (linking to long-term success of the company) and how stakeholders and other factors were considered in making those decisions;
  • bridge information on stakeholders and decisions by considering them in a two-way approach, and incorporate both in the statement (which can be by cross-referencing);
  • are concise, making good use of cross-referencing; and
  • fit into a connected narrative linking to business model, strategy and how business is done (considering governance and culture) demonstrating how the company is progressing in its pursuit of its purpose and long-term success.

The Lab report also builds on the tips on Section 172 statements published last autumn and summarised in this article.

Background

Under Section 414CZA CA 2006, all large companies, including subsidiaries, are required to include a statement in the strategic report on how the directors have had regard to the matters set out in Section 172(1)(a)-(f) when performing their duty to promote the success of the company. These matters cover the interests of employees, the need to foster business relationships with suppliers, customers and others, the impact of operations on the community and the environment, as well as the likely consequences of any decision in the long term, the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly as between the members of the company.

Further information

Alongside the report, the Lab has published a summary of questions for companies to consider when formulating disclosures.

A podcast involving the Lab and two asset managers is also available.