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Section 172 of the UK Companies Act 2006: Desperate Times Call for Soft Law Measures – A Post-Scriptum


Georgina Tsagas
Senior Lecturer in Private and Commercial Law at Brunel University Law School


Time to read

4 Minutes

In late August 2017, the Government published its response to the Corporate Governance Green Paper. Amongst other issues, the Government considered the utility of section 172 CA 2006 within the context of a broader corporate governance reform. Additional proposals were made, which would, in the Government’s estimation, reinforce the utility of the said section with a view to strengthening the employee, customer and wider stakeholder voices (See Section 2 of the document which sets out three key proposals for reform). Ultimately, the Government is essentially passing the baton to other bodies, and mainly to the FRC, to come up with concrete ways to strengthen the utility of section 172 CA 2006. As my previous post suggests, this section of the Companies Act 2006 is often referred to as the provision that will ‘save the day’, but does nothing of the sort.

More specifically, the Government proposes to:

  1. Introduce secondary legislation to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of section 172 to have regard to employees and other interests;
  2. Invite the FRC to consult on the development of a new Code principle that will establish the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business. As a part of developing this new principle, the Government will invite the FRC to consider and consult on a specific Code provision requiring premium listed companies to adopt, on a ‘comply or explain’ basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce; and
  3. Encourage industry-led solutions by asking the Institute of Chartered Secretaries and Administrators: The Governance Institute (the ‘ICSA’) and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders. The Government will also invite the GC100 group of the largest listed companies (the FTSE100 General Counsels) to complete and publish new advice and guidance on the practical interpretation of directors’ duties under section 172 of the Companies Act 2006.

With the Government prompting the FRC to revise the Corporate Governance Code, the proposal I set out in my previous post may be of value.  The proposals made by the Government aim to give stakeholders more voice and to consult on a specific code provision for premium listed companies to adopt (on a ‘comply or explain’ basis) offering employees engagement in one of three ways. The approach adopted by the Government however is far from being ambitious, and, in any case, does not appear coherent. A few points can be made in this respect:

  1. It is not clear why or how the proposed ‘one of three employee engagement mechanisms’ (a designated non-executive director; a formal employee advisory council; or a director from the workforce) constitute the best options for promoting the interests of different stakeholders (the overall objective of the reform proposals), since non-employee stakeholders will clearly have objectives that diverge, at least to some extent, from those of the employees;
  2. There is little, if any, weight being placed on the importance of the process relating to the enforcement of the provisions of the Corporate Governance Code and its exact links to the Stewardship Code and to the reporting requirements already set out in the Companies Act 2006. What needs to be reported is one issue; how reporting is conducted and what safeguards exist to make sure the information contained in the report is credible is another.  Enforcement issues relate to accountability and liability, and this is made most apparent if one refers to the annual report that companies publish, which is a document subject to certain safeguards. A case could be made in favour of following a similar approach regarding any additional reporting requirements adopted, if sustainability and stakeholders are to be addressed in a serious manner;
  3. Favouring stronger reporting requirements appears to be a safe way forward. It should be noted however that this does not deviate significantly from the current status quo if one were to refer to the equivalent provisions of the Companies Act 2006, for example the provisions on the Strategic Report and those implementing the amended and updated version of the Non-Financial Reporting Directive, which applies to certain listed and unlisted companies with more than 500 employees, including public interest entities, and to financial years beginning on or after 1 January 2017. Key questions that remain unanswered are: (i) Which key stakeholders should play a role in assessing the reports? (ii) To whom are the reports addressed? (iii) What are the links between the various reporting requirements?
  4. With Brexit in the horizon, the Government has arguably failed to adequately synch its own revised agenda with the advanced initiatives already taking place at a European and global level relating to the promotion of sustainable long-term investment and growth.  The proposals seem out-dated and fail to seriously acknowledge the need to adopt practical solutions that would facilitate sustainable growth not only at company level, but also at a broader level, for the benefit of the economy, stakeholders, and the environment.

Final comments

Corporate reporting should exist for a purpose and it is important to acknowledge that multiple audiences in addition to investors will be interested in the information provided. Reporting has always been seen as a means of including information that is financially material to investors and, in light of the proposed corporate governance reforms outlined above, it is imperative to revisit the utility that information on issues such as slavery, human rights abuses and other similar issues may have, considering that aspects of such information may not in fact be material to investment. It may also well be the case that the materiality element of information differs significantly from one industry to another. In addition to attention being given to the substantive content of reporting vis-à-vis the target audience of the information disclosed, attention needs to be given to the process observed.

Public disclosure and transparency issues are left untouched by the Government’s response. If there is an apparent inconsistency between what has been reported in the Annual Report and the actions of the company, an application can be made to court alleging that the report has failed to comply with the requirements of the Act. However, as the FRC has a set of different levels of assessment of the adequacy of the company’s disclosure, any dispute that arises will typically be dealt with via an agreement with the company involved and within the FRC itself, so that a more formal process will not be customarily followed.

The lack of transparency relating to FRC investigations may create problems in relation to other stakeholders wanting to engage with the process, considering that the outcome of the investigation is only disclosed to the company under investigation. All concerns referred to above should be addressed if any provisions with wording along the lines of section 172 CA 2006 are to be adopted in secondary legislation.

This contribution is an add-on to the post ‘Section 172 of the UK Companies Act 2006: Desperate Times Call for Soft Law Measures’ that was previously featured on the Oxford Business Law Blog.

Georgina Tsagas is Assistant Professor in Corporate Law at the University of Bristol Law School, United Kingdom.


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