Help for directors on their duties and stakeholder interests

Company directors are generally (hopefully!) aware that their position brings with it a degree of responsibility and that they are subject to various duties. But understanding how to discharge those duties in practice can be harder to get to grips with.

In the latest step of the government’s programme of corporate governance reforms, the GC100[1] has published some practical Guidance on how directors can demonstrate compliance with their “section 172 duty”.

What is the section 172 duty?

The directors’ main obligation under section 172 is to promote the success of the company for the benefit of its shareholders as a whole. “Success” here means long term value creation from which shareholders will benefit.

But, when deciding what particular course of action to take, the directors must consider various factors relating to stakeholder interests. These include the long term consequences of their decision, the effect on both employees and business relationships with customers and suppliers, and factors such as the community and the environment.

Helpfully, the new Guidance confirms that the directors are not required to balance the company’s interests with those of the other stakeholders. Rather, having weighed up all the relevant factors, the directors must then decide which course of action will best promote the company’s success. Just because that adversely affects a group of stakeholders will not call into question the directors’ decision.

Who should read the Guidance?

The guidance is particularly relevant for premium listed companies as the updated UK Corporate Governance Code (which they have to follow) requires directors to explain how they have considered the interests of stakeholders when discharging the section 172 duty.

It is also relevant for companies which qualify as “large” for accounting purposes as these are now required to include a section 172 statement in their annual report, explaining how the directors have taken stakeholder interests into account in their decision–making.

But directors of all companies are subject to the section 172 duty and so all of them should find the new Guidance helpful. As the GC100 notes there is no “one size fits all approach” and so the Guidance is designed to be suitable for all companies.

The detail: five factors and an over-arching theme

Under the over-arching theme of nurturing and developing a corporate culture which is shaped by and which feeds-back into how the section 172 duty is considered and discharged, the guidance sets out five areas of focus to help directors embed the duty into company decision-making.

Strategy 

• In setting out your strategy, identify which third parties are stakeholders and how your company engages with them.
• Maintain ongoing monitoring of these interactions to identify how your activities and objectives interact with stakeholders.
• Consider whether sufficient time and focus are given to longer term, important issues compared with immediate, urgent issues.

Training 

• Ensure that new company directors are provided with timely training and guidance to understand their statutory duties, including their section 172 obligations.
• Extend training to relevant management to ensure the information flowing to the board is appropriate and sufficient to enable the directors to discharge their duties.

Information 

• Ensure that the right information is going to the right person responsible for taking the relevant decision.
• Assess whether the metrics and other reports provided to directors adequately address the section 172 duty. Challenge current information flows rather than assume they are sufficient.
• The key message of the Guidance here is that quality over quantity of information is paramount.

Policies and processes 

• Have policies and processes in place to identify the varying roles and responsibilities of directors, including non-executive directors and managers, in relation to the various facets of section 172.
• Reflect directors’ duties, including section 172, in directors’ terms of appointment and the board’s terms of reference.
• Embed the section 172 factors in remuneration policies and incentives by using appropriate performance measures.
• Adopt a consistent approach to board minutes and the extent to which the section 172 factors are recorded in them (see below).

Engaging with stakeholders 

Consider how you engage with stakeholders and how they perceive your company and its governance through daily and more structured interactions.
How does feedback from stakeholders shape your business?

Wait a minute….

So does the new Guidance mean the section 172 duty and stakeholder factors should routinely be referred to in board minutes? The (welcome) answer seems to be no. The new Guidance is supplemental to, but does not replace, the GC100’s Guidance Note on Directors’ Duties from 2007 which confirms that board minutes only needed to record decisions reached, but not how each of the required stakeholder interests was taken into account (or provide a negative statement where none of them were relevant).

Instead the factors should be taken into account by those preparing board papers so that any relevant factors are brought to the board’s attention and can be taken into account in their decisions. But, where a specific factor is particularly relevant to a decision, or where a decision will have a significant adverse effect on a particular group of stakeholders, it may be sensible to record that this was considered by the board.

[1] GC100 is the association of general counsel and company secretaries working in UK FTSE 100 companies