Understanding s172 Companies Act: a director's duty to promote the success of the company

What is s172 Companies Act 2006?

S172 of the Companies Act contains a duty on director’s to promote the success of their company.

S172 CA 2006 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:

1. the likely consequences of any decision in the long term;

2. the interests of the company's employees;

3. the need to foster the company's business relationships with suppliers, customers and others;

4. the impact of the company's operations on the community and the environment;

5. the desirability of the company to maintain a reputation for high standards of business conduct; and

6. the need to act fairly as between members of the company.

How can a director comply with s172 Companies Act?

The list above are factors that a director must consider in order to comply with its s172 Companies Act duty to promote the success of the company. This will include:

1. Promote success - under s172 Companies Act, directors are required to act in a way that they believe will promote the success of the company for the benefit of its shareholders as a whole. This includes considering the long-term consequences of their decisions and the need to foster the company's business relationships with suppliers, customers and other stakeholders.

2. Consider other stakeholders - directors must take into account a range of factors when making decisions, which may include the interests of employees and the need to act fairly as between members (shareholders) of the company.

3. Reputation - directors must have the company’s reputation at the heart of any decision they make that will affect the company. Directors making decisions should take into account the desirability of the company maintaining a reputation for high standards of business conduct.

4. External factors - as well as considering internal factors such as the impact on employees and shareholders, to comply with s172 Companies Act directors must also consider external factors when making decisions about the company. This will include the impact of the company's operations on the community and the environment.

What is a s172 statement?

Some companies are required to include a statement (known as a s172 statement) in their strategic report describing how the directors have had regard to the matters set out in s172 Companies Act (as listed in the section above) when performing their duty under s172. A confirmation that s172 Companies Act has been considered is not enough for a s172 statement - the disclosure must also explain how the directors have carried out their duties.

The companies that are required to provide a s172 statement are all UK-incorporated companies other than those that qualify as medium-sized (under s465 to 467 Companies Act) or are small companies. Medium-sized companies must have at least two out of three of the following:

• turnover of £36m or less

• balance sheet total of £18m or less; or

• 250 or fewer employees.

What happens if a director breaches s172 CA 2006?

If a director fails to comply with its duties under the Companies Act, the consequences could range from disqualification to damages claims. Find out about the consequences of directors failing to meet their duties here.

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