First Time Reporting Against Companies (Miscellaneous Reporting) Regulations 2018

First Time Reporting Against Companies (Miscellaneous Reporting) Regulations 2018

Annual Reporting – 20/20 Vision

In addition to reporting against the 2018 UK Corporate Governance Code, 2020 will see many companies also report against the Companies (Miscellaneous Reporting) Regulations 2018 (“CMRR 2018”) for the first time. The regulations introduced a number of reporting requirements for qualifying companies to disclose certain information in their annual reports including:

The publication of a Section 172 (“s.172”) statement outlining how directors have complied with their duty to have regard to the matters in s.172 (1)(a)-(f);

• Report on how they have engaged with employees and taken account of their interests;
• Statement in the Directors’ Report summarising how directors have engaged with suppliers, customers and others in a business relationship with the company;
• Statement in the Directors’ Report about the corporate governance arrangements applied by the company;
• Publication of the ratio of the CEO’s remuneration to the median, 25th and 75th quartile pay remuneration of their UK employees in the directors’ remuneration report;
• Illustration of the effect of future share price increases on executive pay outcomes in the directors’ remuneration report

In this article, we will be focusing specifically on the s.172 statement and have outlined some key questions which companies may find useful as they begin drafting their statements:

Where does the requirement come from?

The CMRR 2018 is applicable to financial years beginning on after 1 January 2019. 2020 will be the first year companies are required to report on their compliance with the new regulations in their annual report based on the activities they have undertaken in 2019.

What does s.172 Companies Act 2006 say?

A director of a company must act in the way he/she 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:

• The likely consequence of any decision in the long term;
• The interests of the company’s employees;
• The need to foster the company’s business relationships with suppliers, customers and others;
• The impact of the company’s operations on the community and the environment;
• The desirability of the company maintaining a reputation for high standards of business conduct; and
  the need to act fairly as between members of the company.

What are companies required to publish in a s.172 statement?

UK incorporated companies are already required to produce a strategic report (except those qualifying as medium-sized in relation to a financial year) and which meet two of the three criteria set out below:

• Turnover above £36mn
• Balance sheet assets above £18mn
• More than 250 employees
• Limited liability partnerships are excluded.

Note: a parent company who meets the qualifying criteria/threshold through the process of consolidation must prepare also s.172 statement.

All companies who meet the criteria outlined above (including subsidiaries) are required to publish a statement under the new regulations even if its parent company produces a consolidated group strategic report. The Government’s Q&A on the regulations confirm that subsidiaries are able to cross-reference group statements (where a full explanation is provided) and provide less detail in their own report as many decisions and policies affecting employees, the environment, suppliers etc. will often be made at group level.

The Regulations also permit information required in the directors’ report be provided as part of the s.172 statement where the directors consider them to be of strategic importance to the company. Where a company chooses to report in this way, it must state in the directors’ report that it has done so and in respect of which information it has done so.

Where in the annual report should the s.172 statement be?

The statement must be a separately identifiable statement within the strategic report. As mentioned above, where appropriate companies can cross-refer to other parts of their annual report.
The statement must be made available on the company’s website or a website that is maintained on behalf of the company – publication of the company’s annual report on the website will satisfy this requirement.
Unquoted companies are not required to publish their annual report on a website and must make arrangements to ensure that the s.172 statement is available on a website.

What information should a company include in its s.172 statement?

• Identify the company’s stakeholders, reasons for choosing those groups and the importance of engaging with each stakeholder group;

Our article published in the November Governance and Compliance magazine – “Put a Stake in it” provides further information on how a company could identify its stakeholders and methods of engagement and can be accessed here.

• How has the board engaged with each group of stakeholders during the year under review – what mechanisms has the board used to engage, what matters/topics have the board engaged with stakeholders on, how successful has the engagement been – provide useful and practical examples where possible; and
• How did this engagement influence the board’s decision making or discussions at board level.

In order for the statement to be useful to investors, companies should ensure that they provide specific examples and wholesome explanations – generic statements and boilerplate wording are unlikely to add any value. The FRC’s annual review of the UK Corporate Governance Code (2016 and 2018) published in January 2020 highlighted the “limited discussion of the issues that were important to or raised by stakeholders, and consequently to what extent boards had considered these and the impact they had made to strategy.”

How much detail should companies include in their section 172(1) statement?

There is no reference to the format or level of detail required for the statement within the regulations; however, the Government’s Q&A states that “companies will need to judge what is appropriate. The statement should be meaningful and informative for shareholders, shed light on matters that are of strategic importance to the company and be consistent with the size and complexity of the business.”

How do I get started?

• Read the CMRR 2018 in full as well as the Q&A’s as this will help with any other questions you may have;
• Read the FRC’s Guidance on the Strategic Report;
• If you haven’t done so already, identify your stakeholders as you will find it difficult to write the statement without doing this first and explain why your company believes they are important; and
• If you have not kept a register or record of key decisions by the board, you may need to review past board minutes over the year under review to take note of any of the board’s decisions relating to stakeholder interests and issues.

Contact us

For further information please contact Ben Harber or another member of the company secretarial team.

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