UK: More Guidance Published On New Corporate Governance And Narrative Reporting Requirements

Last Updated: 1 February 2019
Article by David Collins, Richard Barham and Candice Chapman

Further guidance has been published to help qualifying companies comply with new governance and narrative reporting rules set out in the Companies (Miscellaneous Reporting) Regulations 2018 (the Regulations). The Regulations came into effect on 1 January 2019 and apply to financial years from that date.

We summarized the new requirements in our summer 2018 update which can be found here. Regulation 14 now requires very large private companies to state in their directors' report which corporate governance code was applied (or, if not in full or not at all, how and why this was the case), and it is expected that the new Wates Corporate Governance Principles for Large Private Companies will be widely adopted.

Particular guidance on how to satisfy some of the other Regulations has also been published in recent months.

Government Q&A document

The government has published an updated Q&A document which contains useful practical information. Particular points to note are:

  • the updated table at section B of the guidance summarising which companies fall within the scope of each regulation now lends weight to the view that as well as large companies (as defined), certain medium-sized companies (despite satisfying the size criteria for medium-sized companies) will also have to prepare a section 172(1) statement. 
  • This will be the case where such companies are excluded from being treated as medium-sized under section 467 Companies Act 2006 for these purposes. Companies caught by section 467 include:

    • public companies;
    • certain entities carrying on (1) regulated activities under Part 4A FSMA or (2) insurance market activities; and
    • members of any "ineligible group" (a group being ineligible if, for example, any of its members is a traded company, a body corporate (other than a company) whose shares are admitted to trading on a regulated market, or a person (other than a small company) regulated under Part 4A FSMA);
  • whilst the guidance sets out useful practical information, it must be read in the context of the Regulations themselves and appropriate advice should be sought as necessary.

Corporate governance: The Companies (Miscellaneous Reporting) Regulations 2018 - frequently asked questions 

GC100 general section 172 guidance

The GC100 (which represents legal counsel working in FTSE100 companies) has published general guidance for directors on the practical interpretation of their section 172 (Companies Act 2006) duty (owed to the company) to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. 

This builds on their initial 2007 guidance and will help directors to discharge their section 172 duty. Some of the practical recommendations may also help to shape governance strategies that can stand behind new section 172 statement reporting obligations for companies subject to the Regulations. 

Practical steps highlighted include:

  • reflecting the section 172 duty when setting and updating the company's strategy;
  • establishing and attending training courses on induction to the board, with ongoing updates on the section 172 duty in the context of the director's wider duties and responsibilities;
  • considering, and arranging to receive, the necessary information on appointment and subsequently to help with carrying out the role and discharging the duty;
  • putting in place policies and processes to support the company's operating strategy and support its aims in light of the section 172 duty;
  • considering the company's approach to engagement with employees and other stakeholders (whether through board engagement or wider corporate engagement);
  • considering how to embed in the habits and behaviour of the board, management and employees, a culture which is consistent with the company's goals in relation to stakeholders (whether employees, customers, suppliers, local communities, the environment or others affected by or engaging with the company's activities).

The guidance also includes a scenario intended to show how directors could comply with section 172 in a specific business situation, being a large supermarket retailer considering scaling back a product line. 

GC100 Guidance on directors' duties: section 172 and stakeholder considerations

FRC revised guidance on the strategic report

The FRC has published revised guidance on the strategic report that all but small companies must prepare under the Companies Act 2006. Various detailed amendments to the 2014 edition have been made including: 

  • General approach (section 2) - the strategic report should be a cohesive document containing relevant financial and non-financial information. The primary audience of the report remains the shareholders but companies should also consider the interests of wider stakeholders.
  • Materiality - some additional guidance has been provided in section 5 on the application of materiality in relation to the strategic report. The paragraph relating to audit materiality has been removed to avoid confusion.
  • Content elements - section 7 is now split into three sections: (1) legal requirements and guidance for medium and large companies (but not public interest entities) (2) legal requirements and guidance for public interest entities (3) section 172(1) statement requirements for large companies (now in a new section 8 – see below).
  • Section 172 statement guidance - section 8 now provides some helpful recommendations for qualifying companies when compiling their section 172 statement including:
    • the statement should preferably focus on strategically important matters with the level of detail consistent with the size and complexity of the business;
    • discussion on how directors might identify the likely long-term consequences of decisions;
    • consideration (with examples) of how a strategic report might identify key stakeholders (and communication methods), and identify principal board decisions taken during the year, and how regard was paid each time to section 172;
    • how the report might disclose information in relation to the culture that a board has set to ensure alignment with the company's values and objectives.

FRC Guidance on Strategic Report

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