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Section 172 Revisited: will directors need to take a radical new approach to compliance?

Many will be familiar with the duty in s172 of the Companies Act 2006 which requires directors of UK companies to consider the principle of "enlightened shareholder value" when making decisions.

The question now being asked is whether the Government's new s172 reporting regime (alongside increased reporting on the impact of stakeholder engagement on the company's principal decisions), for financial years starting on or after 1 January 2019, will require directors to take a radical new approach to governance. There are already signs that non-governmental organisations (NGOs) see this as an opportunity to lobby businesses for change. The High Pay Centre recently suggested that large companies with highly paid CEOs who are not also accredited living wage employers may not be complying with the spirit of s172.

 In October 2018, the GC100 published its new Guidance on Directors' Duties. It came as a relief to many that their 2007 Guidance still stands, and that they are not advocating a shift in approach towards the treatment of s172 in board minutes and board papers. However, they are encouraging directors to take a more holistic approach to s172, and to ensure that the duty and considering the relevant factors (which may go beyond the factors listed in s172) is embedded into everything that they do as a director. While the 2018 Guidance provides some helpful examples of things to be considered by directors, and action that can be taken to achieve a holistic approach, the main focus is on publicly listed companies, who will already have sophisticated policies, processes and controls in place, and the means necessary to amend these, as necessary. It will be a comparatively bigger task for the large private companies caught by the new provisions to rise to the challenge and consider how best they might adopt new, or adjust current, practices (if at all) in a proportionate way. Section 8 of the FRC's new Guidance on the Strategic Report should also be factored into any board discussions about the new landscape for s172 compliance.