s.172

With our How Do Companies Act campaign, we aim to updatethe Companies Act 2006 to ensure that environmental and societal impact is properly accounting for in financial accounting and so that the principles of accounting match up to the modern customer and investor.

The end goal of this campaign is to change the wording in the Companies Act 2006, s.396 which states that requires a company’s accounts to ‘give a true and fair view of the state of affairs…[and] of the profit and loss of the company’. This campaign proposes that the true and fair view is defined within the Act to include information on the social and environmental impact of the enterprise. This would then be consistent with corporate governance review and requirement of s.172 for directors to show how they have complied. This, too, needs updating with regard to the Corporate Governance Code.

However, currently under s.172, directors must only ‘have regard’ to the impact of the company’s operations on the community and environment [s.172(1)(e)]. This wording is not strong enough, as it is ambiguous what consists having ‘regard’. It is entirely possible that this constitutes an informal, unbinding conversation. Social Value UK support initiatives to strengthen requirements here.

Furthermore, directors only owe responsibilities to a company under s.178(2), meaning that only the company can take legal action against a director to failing to meet their duties. This is a classic single agent issue- ‘without the change to the companies act to ensure that the company as an agent of investors also takes account of the issues in s172, investors will not be able to hold companies and therefore directors to account.

Read more in our Policy Position here.