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How to improve your s172 statement

22 January 2021: ICAEW’s Financial Reporting Faculty reflects on what preparers of large companies’ reports can do to make their Section 172 statements more meaningful and wide-reaching in the upcoming financial reporting period.

Section 172 statements (s172) were first introduced in 2019 to increase director accountability in relation to engagement, long-term impact and behaviour in large companies.

To analyse how s172 reporting has been employed so far and how it could be improved in future financial reporting periods, ICAEW’s Financial Reporting Faculty hosted a webinar featuring insights from Elaine Forrest, Corporate Reporting Specialist at PwC and Vicki Tibbitts, Senior Manager at Deloitte. The webinar forms the basis of this article. 

Reflecting on year one

According to PwC’s annual review of corporate reporting in the FTSE 350, 61% of initial s172 statements focused purely on stakeholders and often conveyed the processes involved rather than the outcomes. Information on the other elements of s172 were either overlooked or difficult to locate within the annual report, namely:

  • the likely consequences of any decision in the long term;
  • the desirability of the company maintaining a reputation for high standards of business conduct; and,
  • the need to act fairly as between members.

Tibbitts and Forrest recommend overcoming this by including examples of decisions made during the year. For each, consider which elements of s172 were most relevant, show how they were addressed and explain why those elements were most relevant.

Looking at the location of the statement, 79% of large businesses chose to place their statement within the strategic report. Although there is a legal requirement to include the s172 statement in the strategic report, it is possible to cross-reference to specific sections of the governance report if that benefits the flow of the annual report and the strategic report still contains a coherent story in and of itself.

When it comes to showing the value of the board, just 51% of companies explained the board’s process for considering s172 in their decision making. Some used case studies to show how a decision was reached through debate and discussion, providing far more insight than saying the board simply reviewed or listened to the issues of stakeholders.

All large companies are required to include an s172 statement, including private companies and subsidiaries, and list it on their website. For subsidiaries, it is not acceptable to point people towards the annual report of the parent company – the statement must be prepared on a company-by-company basis, even if the directors cross over.

Opportunities for improvement in year two and beyond

Plan ahead

Keep a list of major decisions as they occur and detail how conclusions were reached.

Use case studies

Explain how issues were handled, how decisions were made and how engagement with stakeholders has affected decision making. Make sure you use a good cross-section of examples, not just positive or COVID-related ones.

Make it dynamic

The statement should be updated each year to reflect the issues and events affecting your company in that reporting year. 

Know your stakeholders

Some companies were clearer than others about who their stakeholders were and why. Take time to assess who your true stakeholders are before compiling your statement and don’t be restricted to the list in s172. 

Don’t forget the other aspects of s172

Make sure you effectively address all six elements of s172 and don’t focus purely on stakeholder engagement.

Remember the role of the board

How did the issue come to be considered by the board if the engagement wasn’t instigated by them and how was it dealt with?

Find the right structure

Make sure the statement is referenced in the strategic report, if it is not located there, and the directors’ report.