New guidance for directors on corporate governance

Balancing the interests of the business and those of its shareholders and stakeholders has always been a conundrum for company directors, which is why a recent publication of new guidance is to be welcomed.

A review of Section 172 of The Companies Act 2006 began in the middle of last year with the aim of improving standards in the boardroom and helping directors strike the right balance between nurturing a healthy company culture and keeping shareholders happy.

The latest guidance has now been published by G100, an independent organisation that engages with government, regulators and policy makers to bring a practical guidance for business when it comes to compliance.

What is a company director’s duty under Section 172?

Section 172 requires company directors to act in good faith, and to promote the success of the company, for the benefit of the shareholders.

This obligation applies to every aspect of a director’s role, from strategy and culture to budgets and procedures. Section 172 and the new guidance applies to all sizes and types of business. Boards are encouraged to consider the wider implications of their decision-making on their employees, suppliers, customers, community, environment as any other impacts.

The new guidance

At the heart of this new guidance is the theme of culture. When a board is contemplating the culture of the organisation, due consideration should be given to how this will be embedded at every level of the business and in a way that ensures the pursuit of company success is consistent with stakeholder goals – stakeholders being all those who will be affected, from shareholders to directors and staff to local communities and the environment.

The guidance focuses on five key areas where section 172 should be front of mind to ensure boardroom decision making is compliant. These are:

1. Strategy
2. Training
3. Information and how this circulates
4. Policies and process; and
5. Engagement.

In terms of strategy, the new guidance makes some interesting comments on the practical application of the law. It makes the point that it is all too easy for boards to find themselves drawn into immediate and urgent issues, sometimes at the expense of longer-term vision and goals. One thing that directors can do to mitigate this is to consider whether enough time is being allocated to the consideration of strategy and, as part of this consideration, the impact that strategy may have on stakeholders.

In my opinion, the additional commentary offered by this new guidance adds a different dimension to section 172. For example, under “information” the guidance encourages boards to think about reporting and whether the metrics and reports received by the board address the section 172 duty. Does the data that is used to measure business success include measures on stakeholder impact or is it too centred on financial and operational matters?

How does this tie in with corporate governance trends?

This new perspective on section 172 will help boards to think differently when making decisions and to operate more effectively in a way that puts stakeholder engagement front and centre whilst keeping the long-term health and wellbeing of the business at the core of everything, although the need to engage stakeholders is now widely accepted as being crucial to developing a positive corporate culture.

Importantly, large companies will now be required to add a section 172 statement to their strategic reports and all UK companies with over 250 employees will be expected to include a statement in the directors’ report outlining how directors have engaged with employees and the impact this has had on the business. This is altogether a far more holistic approach to corporate governance which recognises something that has been apparent for some time, that the way you behave in one aspect of the business has a knock-on effect on the way others behave, a company’s productivity and the way it is regarded by all those who come into contact with it.

How can Boardside help you?

Here at Boardside we have the expertise and knowledge to provide specialist advice to the board members on directors’ duties and their role in corporate governance. If you would like to discuss these issues, or any matter that may affect your business, Richard Port and his team are on hand to help. Call 01423 594 880 or email enquiries@boardside.co.uk