ICSA: The Governance Institute and The Investment Association (IA) have launched guidance to help UK company boards ensure they understand and weigh up the interests of their stakeholders when making strategic decisions.

This follows the recent publication of the government’s response to its corporate governance green paper consultation. The government recognised the strong support for strengthening stakeholder engagement and reporting on this and proposed a number of ways that it believed these areas could be improved.

The proposals included the completion of the ICSA/IA guidance and for the GC100 group – which represents the company secretaries of the FTSE100 companies – to complete
guidance on the practical interpretation of the directors’ duty in section 172 of the
Companies Act 2006.

Section 172 states that a director of a company must act in the way he considers, in good faith,
would be most likely to promote the success of the company for the benefit of its
members as a whole, and in doing so have regard (amongst other matters) to —
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers,
customers and others,
(d) the impact of the company’s operations on the community and the
environment,
(e) the desirability of the company maintaining a reputation for high
standards of business conduct, and
(f) the need to act fairly as between members of the company.

The government added that it would introduce secondary legislation to require all companies of a significant size (private as well as public) to explain how their directors comply with the requirements of section 172.

The government also said it would invite the Financial Reporting Council (FRC) to consult on the development of a new code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business.

Additionally, the government response paper suggested the FRC could consult on a specific Code provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.

The IA/ICSA paper established 10 principles it believes boards should follow to ensure the stakeholder’s voice is heard in the strategic making. This included identifying – and keeping under review – who their key stakeholders are; determining which stakeholders they need to engage with directly; taking the stakeholder perspective into account when deciding on the recruitment process and the selection criteria of directors and ensuring that appropriate engagement with key stakeholders is taking place.

The guidance also suggested that the chairmen of boards – with company secretary support – needed to take a lead in stakeholder engagement by ensuring should directors are kept adequately trained on stakeholder-related matters and should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders.

ICSA and the IA also state that the board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions and provide feedback to those stakeholders with whom it has engaged.

Stephen Haddrill, chief executive of the FRC said: “Businesses which are successful in the long term support our economy and society by providing employment and contributing to economic growth and prosperity. In doing so, it’s increasingly important that companies’ develop and sustain meaningful relationships with a wider range of stakeholders. This clear and practical guide will be of great help to companies and promote good strategic and governance reporting.”

Last Updated: 28 September 2017