Introduction
Section 172 (1) Companies Act (CA) is one of the key provisions under UK Corporate Governance. However, because of the broadness of its remit, a lot of uncertainties remain for companies and directors as how to comply with these duties.
What is Section 172(1) CA?
Section 172 (1) CA generally provides for a director to – in good faith – promote the success of the company for the benefits of its members as a whole but also considering a non-comprehensive list of other stakeholders or topics (e.g. employees, business relationships, reputation, community). With that, Section 172 (1) CA introduces the concept of enlightened shareholder value, by including considerations of other stakeholders within the decision making, while still keeping the overarching duty of promoting the success of the company for the benefit of its member, i.e. shareholders. On 4th July 2025 parliament was discussion changes of this Section to further focus on environment and employees. This discussion has been postponed until September.
Who does Section 172 (1) apply to?
The duty under Section 172 (1) CA is a duty of all directories in all companies owed to the respective company.
What needs to be done?
Because of a number of scandals with Corporate Governance failures like Carillion, Sports Direct or Thomas Cook, the Corporate Governance rules have been reviewed overall resulting in a Green Paper leading to different changes. One of these changes introduces a reporting requirement for boards to make a statement how they included stakeholders in their decision making. Transparency is one of the tools to increase Corporate
Which Companies must publish a Section 172 Statement?
Companies with two of the following qualifying conditions need to provide such a statement as part of their strategic report.
- Annual turnover of more than 54 million
- Balance sheet total of more that 27 million and
- Average number of employees of more that 250
Where and how to publish Section 172 Statements?
The location of the report is very clear: It is a strategic report disclosure, a standalone statement, labelled as Section 172 Statement. It must be separate identifiable within the strategic report and be made available on the Website.
The content and the level of detail is not specified; thus the company has to identify the stakeholders, engagement with them and report on the engagement in a cohesive way. A failure to publish is an offence by every director and might lead to unlimited fines. In addition, it is a missing opportunity to provide positive information about the company to several stakeholders.
What smaller companies have to do?
If you are a company which is below the thresholds to provide a 172 (1) statement, section 172 CA still applies. A breach might lead to liability of the directors resulting in derivative claims, unfair prejudice petitions or reviews of director’s actions within administration procedures. To be in a better position in case of potential litigation, recording of proper decision making is required. This needs to show the balancing pros and cons within decision making. If such balancing can be shown, usually the courts will not interfere into a business decision, similar to the business judgement rule in the US or Germany. Recording of such decision making is a protection against claims against directors.
How we can help?
If you would like to get more clarity about proper decision making or how to provide a proper 172 (1) CA statement, we are happy to support you, please contact us.
