The Financial Reporting Council’s Financial Reporting Lab has published a Report on stakeholders, decisions and Section 172 statements. The report sets out investors’ expectations in relation to disclosures on stakeholders and the impact of decisions on them and gives best practice examples.
The requirement for companies to report on how directors have had regard to the matters in section 172 of the Companies Act 2006 (see our briefing for further detail) has driven companies to increase reporting on their stakeholders. However, the Report says that there are still calls for better information on how companies are having regard to their stakeholders and taking their perspectives into account.
Recommendations in the Report include:
- Stakeholders – When providing information on stakeholders, companies should:
- identify key stakeholders and their respective interests by reference to the company’s business model and strategy, noting where particular stakeholders’ importance may vary over time;
- describe stakeholder engagement processes, including feedback received, outcomes identified and the impact on decision-making;
- assess opportunities and risks which could impact stakeholder relationships and describe what measures are being taken to manage these relationships; and
- determine appropriate and reliable metrics to monitor stakeholder engagement and report against these metrics consistently.
- Decisions – When setting out the significant decisions taken during the year, companies should:
- link each decision back to the company’s purpose and strategy;
- explain how the decision was reached, including how stakeholders were considered and the potential impact of the decision on each group of them;
- be open about any difficulties or challenges in making the decision, including any prioritisation of particular stakeholder groups or offsetting of short-term negative consequences for long-term benefits; and
- cover the expected and/or actual outcomes of the decision and the long-term implications for the company.
The report also considers the section 172 statement more broadly, cautioning that the statement should cover all aspects of the section 172 duty, not just stakeholders.
Alongside the report, the Lab has also published a summary of key questions, which companies can use to enhance the quality of information provided to investors on stakeholders and decisions, and further guidance on Section 172 statements.