Changes to strategic and director reporting will start to impact boards in 2019. These changes (applicable to private as well as public companies) reflect a redefined approach to corporate governance. They will require directors to report more comprehensively than ever before on the wider impact of their business on society and how they will secure its long term success and sustainability. Reporting will need to describe, not only what directors have had regard to, and mechanisms they have put in place to engage with key stakeholders, but importantly also the effect on their decision-making. Boards would be well advised to consider what procedures and training they should have in place to prepare for the changes, some of which are described below.
Strategic report – a new directors' duties statement
The function of the strategic report in the company's annual report and accounts is to inform shareholders and help them assess how the directors have performed their duty to "promote the success of the company". This is not new. However, for financial years commencing on or after 1 January 2019, boards of companies qualifying as large must include a new "section 172(1) statement" in their strategic report. They must also make it available on a website. The statement must describe how the directors have had regard to the matters set out in section 172(1)(a) to (f) when performing their duty to promote the success of the company. These matters are "the likely consequences of any decision in the long term; the interests of the company's employees; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members". Boards should be reassured that the duty itself has not changed. What is new is the greater transparency around strategic reporting as to how these matters, which underpin a governance approach known as "enlightened shareholder value", have been complied with. While a strategic report is for shareholder benefit and directors' duties are owed to the company, boards will be aware that the statements they make will be public and may be read by others dealing with the company or wishing to hold it to account. As ever, boards will be faced with balancing and giving weighting to these factors, some of which may come into conflict on any given decision. Helpfully, the Financial Reporting Council has given guidance in its revised (July 2018) Guidance on the Strategic Report. It contains some helpful suggestions for the contents of the report, such as the inclusion of a "stakeholder map" to show the company's key stakeholders and the impact the business has on those groups. It also gives examples of the types of decisions boards might face in any given year and what the section 172 statement could cover. For example, statements might be included showing the impact on long term success of the company's capital allocation and dividend policy; or the mitigations taken to reduce impact on employees and the local community of a decision to close an unprofitable division.
Directors' report – new customer engagement and employee statements
Coupled with the new strategic reporting requirements, there is a new customer engagement statement to be made in directors' reports of companies qualifying as large. This statement requires the board to set out how they have had regard to the need to foster business relationships with suppliers, customers and others and the effect of that regard including on the principal decisions taken by the company during the financial year. For companies qualifying as either large or medium with over 250 UK employees, the employee engagement statement is also enhanced to require a summary of how directors have engaged with employees and had regard to their interests and the effect of that regard including on decisions taken in the financial year.
At first sight these requirements may appear overly duplicative with the 172(1) statement. However, guidance accompanying the rule changes explains that there is no need to repeat information which is already included in the strategic report. The purpose of these additional statements is to capture information which would not otherwise be considered strategic enough to be included in the strategic report and allow companies to provide more information. For example they may describe their employee and customer engagement mechanisms, including any statement made under the UK Corporate Governance code as to whether the company has a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director.
Boards should prepare for these changes in advance of their financial year commencing on or after 1 January 2019. For more information on employee engagement, please see the following article. These changes sit alongside other changes to corporate governance, including a new requirement for our very largest companies to comply or explain against a corporate governance code. For more information on those other changes see: Private companies to have their own corporate governance code.