Blog: Making Section 172 come alive

Directors' Blog: Peter Montagnon

Section 172 of the UK Companies Act 2006 has become a kind of code-word for corporate culture.

Mention it in a discussion on corporate governance and learned heads will nod wisely as if all we have to do is get Section 172 right and everything will then be fine.

In a few brief sentences, this piece of legislation manages to capture just about every relationship a company needs to interact smoothly with the society on which it depends for its social licence to operate. Yet this also depends on getting the balance right, and here the authorities seem to be missing a trick.

New regulations oblige companies to report on how they have addressed the requirements in Section 172 to take account of stakeholders, including customers, suppliers and the workforce when making decisions.

But they lay much less emphasis on two other important parts of the Section, which call on directors to recognise the desirability of the company maintaining a reputation for high standards on business conduct and of the need to act fairly as between different shareholders.

Indeed, the regulations focus particularly on suppliers, customers and the workforce. Companies must make detailed statements on highest subjects even where the directors do not judge the information to be of sufficient importance to be included in the Strategic Report for that year. The government says this gives "companies the opportunity to provide more information, for example, about their employee engagement decisions."

There is nothing wrong with this - except that the UK government is sending a clear, hopefully albeit unintentional, signal that arrangements for employees and other named stakeholders are more important than an overall reputation for high standards of business conduct.

This is odd because lax business conduct is at the heart of most corporate scandals. It was certainly true of banks during the financial crisis, which is why the UK now has a Banking Standards Board devoted to securing good conduct. It is true also in Carillion, the horse-meat scandal in the supermarkets, and Sports Direct. Indeed the list goes on and on.

If companies can embed high standards of behaviour, the chances are that this will lead them to make good decisions about the treatment of key stakeholders as well.

Companies which get this point and choose to report on conduct will be doing themselves a favour in terms of reputation as well as finally making Section 172 come properly alive.

Posted: 19/09/2018

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