Acting in good faith: GC 100’s updated guidance on director duties
Directors will be aware of the duty under section 172 of the Companies Act 2006 (the “Act”) to act, in good faith, in a way that they believe would be most likely to promote the success of the company for the benefit of its shareholders as a whole. Directors will also be aware that there is no “one size fits all” approach to discharging this duty in practice. On 22 October 2018, GC100, which is the voice of general counsel and company secretaries working in FTSE 100 companies, published practical guidance for directors on the interpretation of section 172. This new report by GC100 supplements GC100’s existing Guidance Note on Directors’ Duties published in February 2007.
Section 172 is a duty owed to the company and applies to each individual director, even where directors are taking decisions collectively as a board and includes non-executive and investor directors. It requires directors to have regard to a non-exhaustive list of factors including the interests of employees, customers, suppliers, the community and the environment, as well as the company’s reputation. Whilst directors are not required to find balance between the interests of the company and other stakeholders, these factors are designed to ensure that, in promoting the success of the company, directors consider the broader implications of their decisions.
The GC100 Report
Speaking to directors, CG100 suggests practical steps that can be taken to embed section 172 in decision making in their company. In summary:
- Strategy: reflect on the duty when the company’s strategy is set and updated.
- Training: establish and attend training courses for directors on induction to the board, with ongoing updates on the duty in the context of wider duties and responsibilities.
- Information: assess whether there is enough information about stakeholder interests needed to assist decision making and satisfying the duty.
- Policies and process: put in place policies and processes appropriate to support the company’s operating strategy and its goals in light of the duty.
- Engagement: consider the company’s approach to engagement with employees and other stakeholders.
- Culture: consider the habits and behaviours of the board, management and employees generally in the context of the company’s culture. Ensure that the general business activities of the company are consistent with the company’s goals in relation to the duty.
The report elaborates on these points and provides helpful case studies intended to show how directors might comply with section 172 in a specific business situation.
Other reporting duties
In the Companies (Miscellaneous Reporting) Regulations 2018 (the “Regulations”) the government has introduced a new obligation for directors to report, in a section 172 statement, on how stakeholder factors set out in section 172 have been considered. Directors are also required under the Regulations to disclose the section 172 statement on the company’s website. These new obligations do not apply to a company that qualifies as ‘medium-sized’ under the Act. Going forward, directors will need to bear in mind the direct connection between the reporting and disclosure obligations in the Regulations, and how they choose to address their section 172 duty in the Act.
The report emphasises the importance of directors taking a holistic approach to their duties, to ensure that compliance with section 172 and the consideration of relevant stakeholders is embedded into all facets of their role as a director. Whilst the report provides practical guidance and examples, it is important for smaller companies to appreciate the perspective of the contributors of the report, being members of larger, listed companies, in considering how best they might implement comparative changes in their own companies to ensure both compliance with the law and best practice.