Embedding section 172 within the annual report

Section 172 of the Companies Act 2006 requires the directors of a company to ensure that they are working to promote the success of the company and, in doing so, have regard to stakeholder groups. Crucially, it asks the board to consider stakeholder interests during decision making.

As it is still a relatively new concept, many companies dedicate an entire double-page spread within the strategic report to section 172  likely to ensure compliance with regulation.

However, although a distinct statement within the strategic report is necessary, there are a variety of methods available to help embed it more naturally within the annual report itself, which will not only help articulate your story more concisely, but also ensures a consistent narrative throughout.

Moreover, as the pandemic continues to challenge long-term sustainability and success, many companies are having to alter their narrative. It is now more vital than ever to have a discussion around stakeholder engagement and how their interests have been considered in decision making.

Firstly, consider the content. Ensure that it is meaningful, reflects the board insight, is balanced between the positives and negatives, and is linked to relevant sections. A section 172 statement should deliver transparent, reliable and comprehensive information. It should be concise, and clearly articulate the alignment between governance, strategy and performance, and how it is aimed at ensuring the organisation can deliver value, stay consistent with its values, and focus on its vision and mission over both the short and long term. The statement is most commonly situated close to the corporate social responsibility section within the strategic report, as it overlaps and complements the content typically found there. 

Before you discuss methods of engagement, you should consider why the stakeholders chosen are important, and why these methods were taken in light of this engagement. For example, if you have had to refocus your strategy as a result of Covid-19, underline which stakeholders were considered when making this decision and how this may influence the long-term success of the business. 

Furthermore, it is important to note that section 172 requires information beyond just stakeholder engagement. Other factors – such as the future actions that will occur off the back of this engagement – should also be considered. These decisions may ultimately favour one stakeholder group over others, but it is nonetheless important to be transparent and ensure that your content is balanced.

The second thing to consider is implementation. How can this come across effectively within your annual report? This is where your story should be included.

Consider the flow of the content. The reader will want to clearly understand how you have engaged with stakeholders, the methods used, their key interests and how these interests were considered during board decision making.

An infographic could help determine the flow of this content, and could do so in a way that is visually engaging, logically structured and easy to follow (see Rolls Royce plc’s 2019 Annual Report). Other examples consider the report as a whole, making extensive use of cross referencing, which will not only help avoid duplication of content but will signpost to where additional content can be found (see Dechra Pharmaceuticals plc’s 2019 Annual Report).

While a statement will certainly provide a level of coherency, these ideas of interconnectivity will enable you to expand on the content within the statement. For example, case studies detailing how the board came to a decision following on from discussions with stakeholders can add a further layer of understanding – both visual and engaging – while demonstrating how the purpose and values of the business are considered in decision making.

For instance, each strategic priority could have a link to the stakeholder groups that would benefit the most from it, while an infographic towards the front of the annual report could determine how the culture of the business and the stakeholders’ best interests are aligned to ensure the long-term success of the business. 

Finally, the process in which section 172 is tackled should be considered. Key decisions and engagement activities that take place should be noted throughout the year, rather than compiling the information together at the end of it. 

In addition, board meeting agendas and minutes should include this consideration and clearly state which stakeholders are being taken into account during each decision-making process, ensuring greater accuracy and ease for when it comes to compiling the report.

In conclusion, it is important to look beyond just aligning with section 172 from a regulation perspective, and instead use it to help articulate your story and demonstrate how stakeholder engagement is at the core of driving the long-term success of the business. For more information about how we can help you communicate clearly, get in touch.