Major changes to large company narrative reporting effective in 2019

16 July 2018

For periods beginning on or after 1 January 2019, the directors of all large companies will have to prepare narrative disclosures that explain how they have taken wider stakeholders’ needs into account while performing their duties in the year.

Under S172 of the Companies Act 2006 (the Act), directors of UK companies have a duty to promote the success of their company for the benefit of the members as a whole and, in doing so, have regard to:

  1. The likely consequences of any decision in the long term
  2. The interests of the company's employees
  3. The need to foster the company's business relationships with suppliers, customers and others
  4. The impact of the company's operations on the community and the environment
  5. The desirability of the company maintaining a reputation for high standards of business conduct, and
  6. The need to act fairly between members of the company.

The purpose of the strategic report has always been to inform members about how directors have performed their S172 duties but strategic reports have traditionally concentrated more on annual company performance. This is particularly the case for companies that are not caught by the more stringent quoted company and non-financial reporting requirements (see September 2017 Business Edge).

To address this, the Government has added a new requirement for all large companies (including large subsidiaries included in higher consolidations) to include a separate ‘S172 Statement’ in their strategic reports. Unquoted companies will also have to include this new statement on a website (either separately or via the website publication of their annual report).


S172 Statement contents

The legislation provides little guidance on the nature of information that should be included in the S172 Statement but the Government has published accompanying Frequently Asked Questions suggesting that it should include some (or all) of the following:

  • The issues, factors and stakeholders the directors consider relevant in complying with S172(1)(a)-(f) and why
  • The main methods the directors have used to engage with stakeholders and understand the relevant issues, and
  • Information on the effect taking these into account had on the company’s decisions and strategies during the financial year.

The Financial Reporting Council is also revising its Guidance on the Strategic Report and will include a section on this new reporting requirement. UPDATE: This was released in late in July 2018 (See Business Edge article.)


Further changes

Also taking effect for periods beginning on or after 1 January 2019, new directors’ report disclosures will be required as follows:

  • All large and medium-sized companies with more than 250 UK employees (including those employed by a subsidiary of the company) must include a statement summarising how the directors have engaged with employees, taken their interests into account and the effect of doing so (including on the principal decisions taken in the financial year).
  • All large companies (irrespective of the number of staff they employ) must include a statement as part of their directors’ report summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect that has had (including on the principal decisions taken in the financial year).

While these disclosures are strictly speaking directors’ report disclosures, the S172 FAQs envisaged that many companies will want to incorporate these disclosures into their S172 Statement and cross-refer from the directors’ report.

Read more on the further legislative changes.

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