New Disclosure Requirements Affecting Large Companies

Following the collapse of some major companies during recent years, the UK government has sought to change corporate behavior and restore trust in big business by requiring large companies, whether listed or not, to show that they operate responsibly.

Currently large companies, being those which meet 2 out of 3 of the following criteria: turnover of more than £36 million; balance sheet total of more than £18 million; more than 250 employees, are required to publish a narrative strategic report.

However, for periods beginning on or after 1 January 2019, the directors of all large companies are now also required to prepare narrative disclosures that explain how they have taken wider stakeholders’ needs into account while performing their duties in the year, as the Financial Reporting Council “FRC” believes that the integration of non-financial information into the strategic report is vital in telling a company’s story.

This is covered by new legislation in the Companies Act 2006 under Section 172, which states that the directors of UK companies have a duty to promote the success of their company for the benefit of the members as a whole.

In their section 172 statement, the company may want to include information on some or all of the following:

  1. The interests of the company’s employees
  2. The need to foster the company’s business relationships with suppliers, customers and others
  3. The impact of the company’s operations on the community and the environment
  4. The desirability of the company maintaining a reputation for high standards of business conduct
  5. The need to act fairly between members of the company

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.

Also taking effect for periods beginning on or after 1 January 2019, new directors’ report disclosures are required as follows:

  • All large and medium-sized companies with more than 250 UK employees (including those employed by a subsidiary of the company) must include a statement summarizing how the directors have engaged with employees, taken their interests into account and the effect of doing so (including on the principal decisions taken in the financial year).
  • All large companies (irrespective of the number of staff they employ) must include a statement as part of their directors’ report summarizing how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect this has had (including on the principal decisions taken in the financial year).

No doubt these new reporting requirements will provide further disclosure on the actions and behavior of directors in the way they manage the businesses they represent, as well as demonstrating how effective their engagement is with employees and suppliers to contribute to the overall success of the business which will then give a greater degree of transparency surrounding the control and decision making processes within UK companies.

Written by Binod Donal

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