s172 statements and COVID-19: an opportunity to tell your story

Thu 28 May 2020

It is difficult to imagine a more extreme test of corporate responsibility and governance than the coronavirus outbreak. 

Background to the s172 statement

The obligation for companies to consider the effects of their actions on other stakeholders (in section 172 of the Companies Act 2006) was imposed in 2007, in response to concerns that companies were overly focused on short-term profits at the expense of longer term success, the interests of employees, suppliers, customers or the environment.  However, there were no specific requirements on what companies needed to say about this until now.

From 2019, legislation requires a specific section of the annual report; a section 172 report, identifying how the directors have engaged with and considered the interests of other stakeholders when making decisions through the year.  For private companies, which do not generally publish their annual reports, the s127 statement must be published on their website.

Mr company, what did you do during the coronavirus outbreak?

The COVID-19 crisis has undoubtedly forced some hard decisions on companies in the interests of survival. As my colleague Richard Karmel noted in his recent blog, it has also underlined society’s expectation of businesses to combine commercial priorities with wider social considerations.  These decisions will not necessarily be easy or pleasant ones but boards should be willing to discuss the impacts on workers made redundant, suppliers whose orders have been cancelled and customers which the business has been unable to supply.  The s172 report provides an ideal structure for this.  Though the statement was envisaged as a backward-looking exercise there is nothing to stop it looking forward too, and in any case, as the reporting calendar moves forward these will increasingly be decisions taken in the reporting period. 

While listed companies will have the highest profile here, private companies causing significant impacts will not entirely escape scrutiny.  Take the opportunity to tell readers how you have made your decisions rather than let others create the narrative for you.  Show what was considered and how this contributed to the success, or survival of the business in the long-term, how it affected the employees (both those remaining and leaving, and any measures mitigating the impact on the latter, either by offsetting effect or minimising their number).  Tell current and future business partners and society how you engaged with your suppliers to minimise the impact of necessary but painful decisions.

Accounts and accountability

As with any corporate reporting, it is more helpful and credible to quantify, give examples and discuss processes and scenarios than to speak in generalities and platitudes.  While this is more of a governance than a reporting matter, ensure your board processes record other stakeholders impacted by the decisions you made and what efforts you made to establish those impacts in what will have been a fast moving and very difficult situation.  Discuss any special engagement measures employed.  Use the reporting on the crisis to demonstrate the company’s commitment to its purpose, and stated ethos.   

There are many good examples of consideration of other stakeholders; for instance: ABF’s fund to support textile workers in more vulnerable countries or Unilever’s donations of soap and cash-flow relief to support their supply chain.  While neither of these have yet found their way into an annual report due to timing, we’d look when they do, for more detail of what was provided and to whom.  For those companies using the furlough scheme we’d hope that companies would report on how they decided on who was furloughed and what jobs were preserved.  We were advising our clients to consider, when drafting s172 reports before the year-end, to consider what their statements might look like were something to go wrong little knowing that this would be tested so soon.  Be prepared then, post the crisis, to account for your company and your board’s decisions.

Find out more

If you are interested in discussing how your company might approach the new requirements and integrate them with existing reporting, please contact Andrew Jones.

Related Links and further reading

Financial Reporting implications of COVID-19

The impact of COVID-19 on narrative reporting (webinar)

COVID-19: Questioning the social role of business

Section 172 Reporting – Understanding what is required and preparing to meet the requirements.