Companies Act 2006

Human Rights

Environment

Director's Duties

Summary Table

Obligations

Reporting
Due Diligence

Normative scope

Human Rights
Environment
Other Social Matters
Broad Ranging

Value chain scope

Own Operations
Subsidiaries
Direct Suppliers
Indirect Suppliers

Company scope

Large Companies
SMEs
All sectors

Administrative enforcement

Monitoring
Administrative Sanctions

Judicial enforcement

Civil Liability For Directors
Criminal Liability For Directors

Obligations

Reporting
- Section 414C requires companies to include information about environmental matters, employees, and social, community and human rights issues annually in a strategic report.
  Where appropriate, the report must use key performance indicators to make process measurable.
  The report must outline how the directors took due regard to their duties under section 172 (see below).
  Any information not relevant for the understanding, performance or position of the company can be omitted. This and the absence of specific requirements gives companies a lot of flexibility.
- Section 414CA implements the EU Non-Financial Reporting Directive in the UK. It requires certain companies to provide slightly more extensive information on environmental, employee, social, anti-bribery and human rights matters:
  They need to disclose information on their due diligence processes in pursuit of their own policies related to the above, their outcome, and the risks in connection with the company’s operations. They should also describe which business relationships, products and services are likely to cause impacts, and how they manage those risks.
  If a company has no policy for one of the matters mentioned above, it needs to state why it doesn’t have one.
Due Diligence
- Section 172 creates a general duty for directors to promote the success of the company which includes having regard to the interests of the employees, the company’s impact on the community and the environment, and the company’s reputation for high standards of business conduct.

Normative scope

Human Rights
Environment
Other Social Matters
Broad Ranging

Value chain scope

Own Operations
Subsidiaries
Direct Suppliers
Indirect Suppliers

Company scope

Large Companies
- Large companies have to comply with the reporting requirements under s 414C and the general duty under s 172.
- Large companies only have to comply with s 414CA if
  they have more than 500 employees and are
  a traded, banking or authorised insurance company; or
  carrying on insurance market activity; or
  a company whose securities are traded on the Alternative Investment Market; or
  they are a high turnover company with
  an annual turnover of more than £500 million alone, or
  more than £500 million net turnover as a group.
SMEs
- Small companies do not have to publish a strategic report under s 414C.
- Medium-sized companies also do not have to use measurable performance indicators for the reporting requirement under s 414C or explain how they abide by s 172.
- The general duty of the directors to promote the success of the company under s 172 applies to all companies registered in the UK.
All sectors

Administrative enforcement

Monitoring
- The Financial Reporting Council (FPC) is responsible for monitoring and promoting the quality of corporate reporting. However, the qualitative nature of the reports makes monitoring difficult and the FPC has been criticised for taking no enforcement action in the Post Implementation Review 2022.
Administrative Sanctions

Judicial enforcement

Civil Liability For Directors
- A director of a company is liable to compensate the company for any loss suffered as a result of false or misleading statements in the strategic report (s 463)
- A director of a company can be liable for civil damages for breaches of his director’s duties (s 178)
  These claims are typically derivative claims filed by shareholders on behalf of the company (s 260)
  The Court does not typically interfere with board decision-making unless the decision is one that no reasonable director could have made (Wednesbury standards)
  Any court cases alleging a breach of director’s duties under s 172 have been dismissed until now because a reasonable director promoting the success of the company would not pursue such a claim.
Criminal Liability For Directors
The failure to prepare a strategic report is an offence for all directors unless they took all reasonable measures to ensure a report is prepared. They are liable to pay a fine (s 414A).
A director who knows that a strategic report does not comply with the requirements or is reckless to it and fails to take reasonable steps is guilty of an offence. The penalty is also a fine (s 414D).

General Information

Overall, the Companies Act 2006 sets out a very generic duty for directors to promote the success of the company and take different stakeholders, including the environment, community and employees, into account in doing so. It also sets out very generic reporting requirements for a company’s impact on the environment, social matters and human rights. With the implementation of the EU Non-Financial Reporting Directive, the reporting duties increased (but remained very limited). Accordingly, public interest companies (e.g. trading companies, banks and very high turnover companies) have to do due diligence disclosure for their own policies on the environment, social matters and human rights, and disclose outcomes and risks.

Upcoming Amendments and Official Reviews

On 24 May 2023, the UK government started a call for evidence for smarter regulation on non-financial reporting. The consultation is open until 16 August 2023

Documentation

Company Act 2006: here
UK Government consultation on non-financial reporting: here
Financial Reporting Council, “Guidance on the Strategic Report” (June 2022): here
Post Implementation Review for the Implementation of the EU Non-Financial Reporting Directive: here