On 22 October 2018 the GC100 (“GC100”) published guidance on the interpretation of section 172 of the Companies Act 2006 (“Section 172”). This guidance is intended to supplement GC100’s 2007 guidance on directors’ duties under the Companies Act 2006 and comes after the recent publication of the revised UK Corporate Governance Code and the new requirement for companies (other than medium-sized companies) to include a statement in their strategic reports, for financial years beginning on or after 1 January 2019, on how the directors have considered section 172.

 

Section 172 of the Companies Act 2006 imposes a general duty on every director to act in good faith to promote the success of the company for the benefit of its shareholders as a whole.  In making decisions directors must consider a non-exhaustive list of factors including the company’s business relationships with suppliers, customers and others; the interests of its employees; the desirability of the company to maintain high standards of business conduct; and the likely consequences of any decision in the long term.

 

The guidance aims to suggest practical steps which directors can take to create an environment where wider interests are considered in the context of everyday business as well as corporate decision-making. The guidance also includes a scenario intended to show how directors could comply with Section 172 in a specific business situation.  The guidance emphasises:

 

Training – directors should be provided with appropriate induction training highlighting company visions along with regular updates on duties at board and managerial level.

 

Strategy – where a company’s strategy reflects shareholder interests or goals, directors should be appropriately and proportionately monitoring and reinforcing those elements of the company’s activities.

 

Policies and processes – appropriate policies and processes to support the company’s operating strategy and goals in light of the Section 172 duty should be adopted.  Directors of subsidiaries and joint venture companies must understand that their duty under Section 172 is owed to the subsidiary, not the parent, but that important and proper views of the parent will most likely be considered. At management level training/guidance should be provided on writing effective board papers to ensure the impact of a proposed decision is clearly explained to the board.

 

Information – appropriate information (including focus on financials, operational issues, shareholder interests and factors relevant to the company) must flow to directors ensuring that informed decisions can be made by the correct people at board level.

 

Engagement – the guidance refers to the ICSA and Investment Association guidance on shareholder engagement making additional points around how shareholder groups experience the company’s board and management through direct business interactions with those they deal with in the company. The balance between customer/employee surveys responses and complaints should balance with specific board or senior management interactions with smaller shareholder groups.

 

Culture – the importance of board and senior management actions and leadership is key. The company’s culture can develop so that relevant shareholder factors are built into the conduct of the company’s business. An appropriate culture should be embedded at all levels and companies should consider which cultures are right for different parts of the company’s activities.

 

Although there has been no change to the duty under Section 172, wider shareholder engagement has been a key factor in recent corporate governance reform discussions. This has thrown Section 172 into the spotlight, prompting a more practical interpretation of what the Section 172 duty actually requires.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.