Co-ordinated s172(1) reporting
As Mei Ashelford explains, good reporting starts with good content gathered from sources right across the business.
In the last edition of By All Accounts, Amanda Swaffield discussed new stakeholder 
Some of the first FTSE annual reports of the 2019/20 reporting season have landed and we are seeing several different approaches to s172(1) reporting. The statements vary in format, detail, length and location; some are fuller, standalone statements while some are simple tables with cross-references to other parts of the annual report (not dissimilar to the approach taken to many non-financial information statements). Most are somewhere in between. As with all things new it will take time for best practice to develop, and no single approach will work for all companies, as much will depend on the overall structure, content and narrative flow of the specific annual report.
Not all the examples of s172(1) reporting that have landed so far are of equal quality – some are better than others. The Financial Reporting Council’s Guidance on the Strategic Report 2018 states that “the s172 duty is consistent with the principle of enlightened shareholder value; recognising that companies are run for the benefit of shareholders, but that the long-term success of a business is dependent on maintaining relationships with stakeholders and considering the external impact of the company’s activities.” For s172(1) reporting to be of value, the annual report must explain how directors have taken into account the wider long-term impact of the company’s activities in their strategic and operational decision-making.
What does this mean in practical terms?
Regardless of the presentation of the statement (ie, whether it is a standalone statement of prose, a table of cross-references to other parts of the annual report, or somewhere in between), all good corporate communications must start with good content. And good content must be based on real evidence; evidence that demonstrates how directors have discharged their s172 duty.
The annual report is often owned by one of the investor relations, external communications, finance or company secretarial teams (or a combination thereof). In most instances the owner(s) of the annual report will, however, not be aware of everything that has happened across the business that might provide evidence to support a s172(1) statement. To avoid boilerplate reporting, companies will need to identify evidence that brings their s172(1) reporting to life. An evidence-gathering exercise must therefore be undertaken as an initial first step. This can happen ahead of time, which will help to ease time pressure around the year end.
So how do you go about gathering this evidence and how do you then work out the best way to report it? Here is my recommended four-step process.
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Understand the s172 duty
There is a common misunderstanding that s172 is only about stakeholder engagement; this is not the case. The s172 duty falls under three main themes: engagement, long-term impact and behaviour.
Under s172, directors are duty bound to act in a way that promotes the success of the company and in doing so have regard to:a. the likely consequences of any decision in the long term;
b. the interests of employees;
c. the need to foster business relationships with suppliers, customers and others;
d. the company’s impact on the community and environment;
e. the desirability of the company maintaining a reputation for high standards of business conduct; and
f. the need to act fairly as between members.In broad terms, only parts (b), (c) and (f) relate to stakeholder engagement. Long-term impacts are particularly drawn out in parts (a) and (d) and corporate behaviour in part (e).
Arguably, impact and behaviour run through all six parts. Early observations indicate that companies have focused heavily on stakeholder engagement to the detriment of the other requirements. -
Gather evidence
Good reporting requires good content. The next step is to gather evidence from across the business on the s172 themes of engagement, impact and behaviour. This requires a co-ordinated effort as there will be multiple teams and individuals involved in, and responsible for, these activities. Here are some questions to consider when gathering evidence:
Engagement
Who are your key stakeholders? How do you engage with them, both formally and informally? Who undertakes the engagement? Who is responsible for overseeing it, and collating feedback? Where does that feedback go? What key issues were raised during the year? How did the business respond? How is a stakeholder’s voice heard in the boardroom and taken into account in strategic decision-making?
Impact
What impact does your business have on your key stakeholders, both financially and non-financially? What is your impact on the environment and how are you minimising negative impact? What is your impact on society and how are you maximising positive impact? Do you track your impact? What metrics do you use? What successes have you had during the year? What are your priorities for next year?
Behaviour
What is your corporate culture and the associated behaviours? How is this aligned with your strategy and business model? How does the board monitor culture? Has the business changed its behaviours this year? If so, how? What controls, policies and procedures are in place to keep behaviour in check? -
Identify what is material
It can be dangerous to be armed with too much information. Not all the information gathered should be included in the annual report. The Guidance on the Strategic Report 2018 states that the purpose of the annual report is to “provide shareholders with relevant information that is useful for making resource allocation decisions and assessing the directors’ stewardship”. However, it goes on to add that the annual report “should address issues relevant to… other users where, because of the influence of those issues on the development, performance, position or future prospects of the entity’s business, they are also material to shareholders”.
An exercise to identify what is material to shareholders, and why, will need to be undertaken. For example, raising money for a charitable cause is most likely not going to be material to shareholders, however if it is part of a much wider social impact strategy, it might be. Once this filtering exercise has been completed, the information left is the “good content” that will provide useful and insightful reporting. -
Develop a detailed structure and content plan
Once the material information that supports the s172(1) statement and brings the story to life has been identified, the next step is to organise it into a logical, connected and flowing narrative. As part of this, you should decide on what format the company’s statement should take.
The Guidance on the Strategic Report 2018 notes that “there will be linkages and overlaps between information contained in the strategic report and that required to be included in the s172(1) statement. Companies are encouraged to avoid repetition, maintain the cohesion of the narrative contained within the strategic report and incorporate information into the s172(1) statement by cross-reference where appropriate”.
Section 172 crosses over between governance and reporting, with the execution of the duty demonstrated through governance practices, and the reporting of that activity (ie, the
s172(1) statement) appearing in the strategic report.
Producing a detailed structure and content plan will give all content authors sight of where their content will sit within the annual report, how everything links together and the specifics of what they should be writing about.
Find out more about the recent changes in governance and reporting regulations including s172(1) statements in Gather’s series of Reporting Intelligence white papers available at gather.london/insights.
About the author
Mei Ashelford, Director of reporting intelligence at Gather