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GC100 guidance on directors’ duties under section 172 Companies Act 2006

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Summary: The GC100 has published guidance on the interpretation of section 172 of the Companies Act 2006. This coincides with the recent publication of the 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.

Background

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

Practical steps to help directors discharge their section 172 duty

Strategy – reflect the section 172 duty when you set up and update your company’s strategy.  For example, where your corporate vision, goals or strategy reflect stakeholder interests or goals, are directors appropriately and proportionately monitoring and reinforcing those elements of the company’s activities?

Training – are new directors being provided with appropriate induction training along with regular updates?  Consider appropriate training for directors of subsidiaries and management.

Information – consider information flows.  Is the information directors receive too focussed on financials and current operational issues or is there too much information which obscures the things that really matter for the success of the company? To assess what information is required directors should ask themselves whether they know enough about stakeholder interests and factors relevant to the company.

Policies and processes – put in place policies and processes appropriate to support the company’s operating strategy and goals in light of the section 172 duty.  Ensure that directors of subsidiaries and joint venture companies understand to whom they owe their duty under section 172 . Consider providing training/guidance to managers on writing effective board papers to ensure the impact of a proposed decision is clearly explained to the board.

Engaging with shareholders – how do stakeholder groups experience the company’s board and management through direct business interactions with those they deal with in the company? Consider the balance between customer/employee surveys responses and complaints on the one hand and specific board or senior management interactions with smaller stakeholder groups on the other hand.

Culture – bear in mind the importance of board and senior management actions and leadership in setting culture.  All businesses should embed appropriate culture at all levels and companies should consider which cultures are right for different parts of the company’s activities.  Many of the most admired companies have a strong sense of social purpose and/or stewardship approach to their business, their stakeholders and the environment.

View GC100 guidance

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