FRC advice to make Section 172 statements useful

The Financial Reporting Council (FRC) Lab has published a set of tips to help companies with preparing the Section 172 statement reflecting the board’s consideration of stakeholders in pursuit of the success of the company, after speaking to institutional and retail investors and other stakeholders about what they consider useful reporting

Section 172 statements were introduced by The Companies (Miscellaneous Reporting) Regulations 2018 and were first applied to the reporting periods of relevant companies for financial periods beginning on or after 1 January 2019.

The FRC says the first year of reporting on directors’ Section 172 duty to promote the success of the company has seen companies try a variety of approaches, and the Lab’s tips are intended to help companies consider what content to include, how to present it and how to facilitate the process of preparing the statement.

The tips advise that content should be ‘specific and genuine’ and says the section 172 statement should not be just a compliance exercise.

Instead, it should reflect on how the company met the requirements, explain what is relevant to it and what happened during the year and, where applicable, what the board and management plan to do in future.

It should link to the company’s strategy, include difficulties as well as positives, and should explain why particular stakeholders are identified as key, identify why particular engagement methods were effective, and show how key decisions were taken in light of engagement and feedback which may have accumulated over time. It should also provide material KPIs on key stakeholders.

The Lab said the Section 172 statement ‘should be presented in a way that makes sense’, with the company paying attention to the flow and context.

Companies should think how the statement fits within the context of stakeholder engagement and how the statement itself can provide context to other areas. For example, the board’s decision-making can provide a framework for how stakeholders are considered, and therefore sequencing the statement ahead of a section on stakeholders can be helpful for investors’ understanding and ease of finding information.

It should be clearly labelled and referred to in the contents page of the annual report.

Companies should also use cross-referencing to enhance understanding, by providing links to specific information, and should include examples and case-studies of significant strategic decisions taken during the year, explaining how stakeholders were taken into account.

Finally, companies are encouraged to start on the process early, by highlighting during the course of the course those key decisions and engagement activities which could be considered for inclusion in the statement as they happen, rather than just compiling information at the end of the year.

The Lab suggests companies consider tailoring templates for board agendas, papers and minutes to include reminders for both the board and management to consider which stakeholders are relevant for decisions.

Phil Fitz-Gerald, FRC Lab director, said: ‘The requirements for the Section 172 statement have continued to shine a light on the importance of a company’s stakeholders and we are pleased that boards are increasingly discussing these matters, particularly during the challenges they are currently facing with Covid-19.

‘Section 172 is not just about stakeholders and engagement with them, but about how directors are considering them and other matters in pursuit of the company’s success. We hope the tips can help companies as they start planning their next statements.’

Useful links:

FRC Lab tips

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