New GC100 Guidance on s. 172 of the Companies Act 2006
On 23 October 2018 the GC100 published its Guidance on Directors’ Duties, Section 172 and Stakeholder Considerations (the Guidance). The Guidance supplements the previous guidance issued by the… Read more
On 23 October 2018 the GC100 published its Guidance on Directors’ Duties, Section 172 and Stakeholder Considerations (the Guidance). The Guidance supplements the previous guidance issued by the GC100 in 2007 when the statutory duties of directors in the Companies Act 2006 (the Act) came into force. The previous guidance focused on the extent to which board papers/board minutes needed to document consideration by directors of the factors listed in section 172.
The Guidance aims to provide directors with practical help on their performance of the section 172 duty and includes key suggestions of matters for directors to consider and practical steps that directors can take. The Guidance focuses on section 172 only and not the full range of directors’ duties under the Act or the wide array of obligations of directors under other laws outside of the Act. The Guidance also assumes that the company is not in financial difficulties that require directors to act in creditors’ interests.
Under section 172 of the Act every director is under a duty to act, in good faith, in a way that they believe would be most likely to promote the success of the company for the benefit of its shareholders as a whole. The Guidance confirms that, for most commercial companies, this will mean long-term value creation. In discharging the 172 duty, directors are required to have regard to (amongst other things) the interests of employees, the need to foster relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the company’s reputation and the need to act fairly as between members of the company.
The Guidance emphasises that:
- there is no “one size fits all” approach to discharging the duty under section 172. All directors must exercise their own judgement and different directors will come to their own decisions, depending on their own judgements and experiences. In addition, every situation will be different. A big decision (e.g. shutting a factory and making a large number of employees redundant) will usually require more time and analysis than a smaller decision. Some decisions will not require the involvement of the board of directors at all;
- a director’s duty is not to balance the interests of the company and those of other stakeholders. Rather directors should, after weighing up all relevant factors, ask themselves which course of action best leads to the success of the company (having regard to the long term); and
- ultimately, directors should aim to have suitable processes in place so that in taking decisions to promote the success of the company, they have considered the longer-term consequences and the wider stakeholder considerations.
The Guidance suggests five practical measures directors can take to embed section 172 in the company’s decision making:
- reflect the section 172 duty when setting up and updating the company’s strategy;
- establish and attend training courses on induction to the board with ongoing updates on the section 172 duty in the context of directors’ wider duties and responsibilities;
- consider and arrange to receive the information directors need on appointment and going forward to help them carry out their role and satisfy the duty;
- put in place policies and processes appropriate to support the company’s operating strategy and to support its goals in light of the section 172 duty; and
- consider the company’s approach to engagement with employees and other stakeholders (whether via board or wider corporate engagement).
The Guidance concludes by alluding to an over-arching theme, which is that directors should seek to embed in the habits and behaviours of the board, management and employees a culture which, in the pursuit of the company’s success for the benefit of shareholders, is consistent with the company’s aims in relation to employees, customers, suppliers and other stakeholders, local communities, the environment and anyone else affected by the company’s activities.
The Guidance provides directors with helpful further clarification on what they should be doing to ensure that they are fulfilling their duty under section 172.