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Clifford Chance

Clifford Chance

Briefings

Meeting the requirements of the s172 statement

16 October 2019

Insurers and brokers should act now to prepare for the new reporting rules.

New reporting requirements came into force on January 1, 2019 for large private companies, including a new disclosure requirement in connection with s172 of the Companies Act 2006 introduced by the government as part of its corporate governance reform strategy.

From 2020 large companies will need to include a statement in their strategic report describing how their directors have had regard to the s172 duty. The new reporting requirements affect any UK-based insurer or intermediary (including subsidiaries) already required to produce a strategic report and that meets two of three of the following: a turnover of more than £36m ($45.8m); a balance sheet total of more than £18m; and more than 250 employees.

The s172 duty requires directors to run the company for the benefit of its shareholders as a whole and in doing so the board should take into account the long-term impact of any decision, maintaining stakeholder relationships, the external impact of its activities and maintaining a reputation for high standards of business conduct.

Although the duty itself has not changed, the new requirement is part of a reporting trend where companies are required to place more emphasis on the corporate governance content in their annual reports and show in their disclosures how the directors have met their s172 duty.

Regulated firms are already subject to strong and effective corporate governance requirements and operate under the watch of the regulators; however, the new obligation for boards to report on their actions, behaviours and decisions takes compliance with this duty a step further.

The GC100 has published guidance giving practical steps directors can take now to embed s172 decision-making in their company at all levels and make it a part of its culture. The Financial Reporting Council (FRC) has given specific direction on the content of the s172 statement.

The statement should broadly cover: the issues, factors and stakeholders relevant in complying with s172 and how the board formed that opinion; the main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard; and information on the effect of that regard on the company’s decisions and strategies during that financial year.

Companies should be reviewing their existing practices now and consider their engagement methods with each of the company’s key stakeholders and then how the stakeholders’ interests inform the most senior-level decisions regarding the company’s strategy.

In identifying the relevant stakeholders, the FRC guidance encourages companies to go beyond the list prescribed by s172 and consider all relevant stakeholders, such as its relationships with pension schemes, pensioners and the workforce, including those without a contract of employment. Insurers should also consider their relationships with policyholders, reinsurers, brokers and possibly UK and overseas regulators, trade bodies, key and strategic suppliers and distribution partners.

Effective management of key stakeholders must be demonstrated in the strategic report. This can, for example, be achieved by including a stakeholder map as part of the disclosures, which identifies who the key relationship owners are, key engagement methods and how the board receives sufficient information about stakeholder interests.

Establishing an effective reporting framework takes time and requires buy-in from more than just the directors. Now is the time for directors to engage with their employees and stakeholders.

This article first appeared in Insurance Day