For well-run companies, the new requirement to report on how their boards have discharged their duty under Section 172 (S172) of the Companies Act to “have regard to” the interests of employees, customers and other key stakeholders is nothing more than a welcome increase in transparency.
The duty set out in S172 is certainly not new, and those companies will already have in place good mechanisms to make sure that board papers include an analysis of relevant stakeholder considerations and the potential impact of the options put forward for consideration, that the right people are in the boardroom for the discussion and that the minutes of the board’s deliberations record the careful balance that is ultimately reflected in its decision.
Even the best companies can improve, and the new reporting requirements should be a trigger for all companies to review how board decisions are informed and reached. For individual board members, it will be a catalyst to learn more about the views of customers, employees and other stakeholders and to ask more challenging questions about how those views are being addressed.
For some decisions, the more effectively that stakeholder considerations are mapped out, the harder it will be to achieve consensus. The chair should feel a greater responsibility to seek out and manage more diverse views from the board.
Of course the S172 reporting requirement is just part of a global shift in stakeholder orientation. The increasing focus on the wider social purpose of companies, challenging traditional views of shareholder primacy, have been a long overdue reminder that companies do not operate in isolation. Companies are part of a complex, interdependent network of stakeholders and ensuring a healthy and thriving network is in the long term interests of the company.
The new S172 reporting requirement comes at a time when significant swathes of society continue to feel let down (or left behind) by capitalism. The latest Edelman Trust Barometer shows ongoing challenges for companies building trust with their stakeholders. Edelman’s research identifies competence and ethics as being the key drivers of trust, with ethical drivers three times more impactful. UK business is viewed as competent enough, but towards the bottom of the pack in terms of ethics.
The trust gap
Our own research at the Institute of Business Ethics reinforces the scale of the trust gap. Just over half (57%) of the British public now say that they consider British business to behave ethically, compared with 62% last year and 47% in 2003 when the survey was first launched.
The top three issues concerning the public remained the same in 2019; tax avoidance, executive pay and environmental responsibility. There is a widespread feeling that boards are making poorly informed, or simply poor, decisions in relation to ethical matters.
The enforced transparency for companies puts board decision-making under the spotlight. Courageous companies will seek to differentiate with meaningful disclosures that bring to life how stakeholder considerations are balanced. These disclosures are the opportunity to showcase the ways in which boards think about the effects of their decisions on broader stakeholder communities and how they have reached their most difficult decisions.
The role of the board is ever more challenging, and big decisions will be made against a complex fact pattern that is fraught with ambiguity and uncertainty. There is often no objectively right answer, yet board decisions may well play out in public and be judged with the benefit of hindsight. The consequences of getting it wrong are ever more serious.
S172 reporting is a great opportunity to demonstrate that a board is doing its best to make decisions that are fully informed as to stakeholder considerations and that reflect the board’s best efforts to reconcile multiple conflicting demands.
A nuanced role
The reality is, of course, that boards don’t operate by making a series of isolated decisions. A board’s role is much more nuanced as they set the strategic direction for an organisation, hold management accountable for delivering it, and offer encouragement and constructive challenge on the way.
The UK Corporate Governance Code sets out a number of methods for engaging with the workforce in order to help ensure that employee interests are properly considered. Boards need to ensure they have equivalent methods for active listening and engagement with other stakeholder groups.
It will be a noisy year for S172 as the new reports start appearing in numbers. Let us hope that the best companies choose to make the most of this new regime and that it triggers not just some high-quality and insightful disclosures but also some challenging internal conversations around board effectiveness.
I recall that the first year of the viability report produced some very high-quality board debate, yet that reporting quickly fell into a pattern of bland conformity.
Those preparing and those responding to S172 reporting have a responsibility to ensure that it is an authentic description of how the most significant decisions are made and a place for a genuine insight as to how boards are operating and how companies are discharging their broader obligations to society.
Mark Chambers is associate director of the Institute of Business Ethics.