Building trust through meaningful disclosure
As the first section 172 statements begin to appear, here are some top tips for engaging reporting.
The annual report cycle is now in full swing and we are starting to see the first reports published under the updated UK Corporate Governance Code and Companies (Miscellaneous Reporting) Regulations 2018.
However, one element in particular is causing companies a lot of uncertainty – the section 172 (s172) statement.
With longstanding concerns from government and regulators that some companies are focused solely on short-term financial performance, a view reinforced by the collapses of companies such as Carillion and BHS, changes including the s172 statement are designed to push directors towards a longer-term view with broader consideration of their stakeholders, and restore some of the public’s trust in business.
In essence, the s172 statement requires the Directors to report on how their deliberations and decisions taken during the year have promoted the long-term sustainable success of the company for all their stakeholders.
What does this mean in practice?
Companies are required to engage with their key stakeholders and describe how the interests of these stakeholders have been factored into principal Board decisions – matters of strategic importance – during the year. A clearly defined statement setting out how this has taken place has to be included in the strategic report.
The FRC recommends the following framework:
Identifying relevant stakeholders, issues and factors including employees, suppliers and customers as well as community and the environment
Explaining how the company has engaged with these stakeholders during the year, topics discussed and feedback
Setting out how the Board is kept informed of stakeholder views and how they have taken their views and any impacts into account when making key decisions during the year
The amount of detail required hasn’t been set out by the FRC. Companies should judge what is appropriate, including those matters that are of strategic importance to the company.
For many companies, the s172 statement simply formalises what they have already been doing – working together with their customers and business partners to ensure they meet their needs, building a good working environment for their employees and developing a culture that drives long-term performance.
So how are companies approaching it?
It’s still very early days – we are just starting to see the first companies reporting under the new requirements and as you might expect a range of approaches are being adopted, though in general examples are broadly following the FRC’s framework.
The good examples we’ve seen focus on making the statement relevant and specific, and avoiding boilerplate disclosures. They do this by discussing relevant stakeholders and areas of engagement, sometimes by way of case studies, identifying Board decisions taken during the year around a variety of issues, including changes to the dividend policy, acquisitions made or the company’s approach to climate change, and explaining how stakeholder views were factored into these decisions.
Two good recently published s172 statements are those by Barclays and Lloyds, although their highly detailed approach may not be appropriate for smaller or less complex companies. William Hill’s s172 statement is another good example, making good use of cross-referencing and linking to a case study on Board decision making in the governance section.
One of the key pitfalls to be aware of is the risk of duplication, because the statement draws on information from both the strategic and governance reports, so it is important that the thinking and content is joined up.
What are our top tips?
Think about how you currently talk about your stakeholders. Ensure that the s172 statement is joined up with your current reporting, building on what you already report rather than viewing it as a standalone statement
The statement doesn’t need to be long. The best examples avoid duplication and cross-reference from the statement to relevant content elsewhere in the report
Make it meaningful. As we’ve seen with some of the good examples already published, the best statements include specific examples of strategic decisions taken during the year and issues considered rather than generic or boiler plate statements
It’s an opportunity to tell your story. Use the statement as a spring board to explain what’s relevant to your key stakeholders – customers, employees and partners - and what you are doing about it, thus demonstrating your commitment to wider value creation and long-term success.
The s172 statement may feel like a tricky requirement to comply with and will likely be something of a work in progress in this first benchmark year. But as well as being an important new requirement, it can serve as a useful tool to articulate your long-term investment case and it is worth investing the time and effort to get it right.
If you would like to talk about the best way to approach the s172 statement in your report, get in touch with [email protected].
Keep an eye out for the second edition of our First 25 research, which identifies the trends from the first December year-end annual reports to be published, and will look at the s172 statement in detail – coming this Spring!