The question now being asked is whether the Government's new s172 reporting regime (alongside increased reporting on the impact of stakeholder engagement on the company's principal decisions), for financial years starting on or after 1 January 2019, will require directors to take a radical new approach to governance. There are already signs that non-governmental organisations (NGOs) see this as an opportunity to lobby businesses for change. The High Pay Centre recently suggested that large companies with highly paid CEOs who are not also accredited living wage employers may not be complying with the spirit of s172.

 In October 2018, the GC100 published its new Guidance on Directors' Duties. It came as a relief to many that their 2007 Guidance still stands, and that they are not advocating a shift in approach towards the treatment of s172 in board minutes and board papers. However, they are encouraging directors to take a more holistic approach to s172, and to ensure that the duty and considering the relevant factors (which may go beyond the factors listed in s172) is embedded into everything that they do as a director. While the 2018 Guidance provides some helpful examples of things to be considered by directors, and action that can be taken to achieve a holistic approach, the main focus is on publicly listed companies, who will already have sophisticated policies, processes and controls in place, and the means necessary to amend these, as necessary. It will be a comparatively bigger task for the large private companies caught by the new provisions to rise to the challenge and consider how best they might adopt new, or adjust current, practices (if at all) in a proportionate way. Section 8 of the FRC's new Guidance on the Strategic Report should also be factored into any board discussions about the new landscape for s172 compliance.

Below are some practical steps to take in preparation for future s172 reporting:

• Take a fresh look at culture and s172 compliance. Consider how compliance will be articulated in forthcoming annual reports, alongside an assessment of the company's broader culture. Has the company publicly stated what its culture and values are?
• Identify and disclose key stakeholders and review current engagement levels and impact on decisions. Consider at board level who the company's key stakeholders are, and the merits of publicly disclosing them via a stakeholder matrix, the current level of engagement, including whether it should be enhanced and the impact it has on decisions.
• Consider stakeholders in strategy. Make sure that s172 is a standing item on the agenda when the board is setting the company strategy and considering risk.
• Review board and management training. Consider amending the content and/or frequency bearing in mind the increased scrutiny on s172 compliance, and the importance of adequate information flows to the board via board papers and more generally.
• Review policies and processes, and consider whether these should be adjusted. The FRC suggests that companies may wish to identify the principal decisions taken during the year in their s172 statement, so consider whether the company currently has a process in place to identify these. What is the current approach towards s172 compliance in board minutes and board papers? Is a shift in approach justified and / or will it make future s172 reporting simpler?

Authors:

Beatriz Araujo, Partner, Baker McKenzie E: Beatriz.araujo@bakermckenzie.com
Jo Hewitt, Partner, Baker McKenzie E: jo.hewitt@bakermckenzie.com
Laura Bentham, Professional Support Lawyer, Baker McKenzie E: laura.bentham@bakermckenzie.com