Aside from AccountAbility, the IIRC places more importance on the role of corporate governance in determining materiality than do the other NGOs concerned with corporate reporting. In a background paper for its <IR> Framework, the IIRC stated:

Another unique feature of materiality for <IR> purposes is that the definition emphasizes the involvement of senior management and those charged with governance in the materiality determination process in order for the organization to determine how best to disclose its unique value creation story in a meaningful and transparent way.

In the spirit of "narrowing of judgment," we think it possible to be more specific about the role of the board in determining materiality. In fact, we will argue that the responsibility for making this determination ultimately lies with the board and that, in order to fulfill its fiduciary responsibility, it must do so. However, in order to prescribe a more specific role for the board and to outline board tasks in the annual integrated reporting cycle, we must first review its basic, if often mischaracterized, role as an actor in the social construct of materiality.

In one of the most important business books of all time,38 The Modern Corporation and Private Property,39 Adolf Berle and Gardiner Means identified three broad privileges granted to corporations by the State:

1. The ability to limit liability, or to socialize losses, while privatizing profits, thus attracting risk capital.41

2. The ability of corporations to own other corporations, allowing for concentration of control disproportionate to share of risk capital.42

3. The separation of ownership rights from control rights, enabling freely tradable shares.43

In summary, "The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital . . . [Such owners] have surrendered the right that the corporation should be operated in their sole interest."44 As noted at the beginning of this chapter, since society has granted corporations these special privileges, corporations have a moral, if not a civic, duty to think not only of profits, but also of the good of society.45 This underpins the duty of corporations to not just "perform," but also to "report" material actions back to society beyond those that are profit-related.

The duty of a corporation to take society's interest into account in exchange for these special privileges is held, in trust, by the board of directors. Through the corporate privilege of personhood that is granted by society, a corporation arrives at its own legal identity, separate from its shareholders, directors, managers, employees, and stakeholders. As such, it has the capacity to survive many generations. In his book Firm Commitment, Professor Colin Mayer of Oxford University noted that the corporation's current decisions will have an impact long after the tenure of its current management and directors has expired, and, that consequently, the board is the appropriate trustee of the firm's intergenerational commitment.46 This implies that director judgment must be informed by a keen sense of the social context within which the corporation is operating, further informing their oversight of the management team in formulating and implementing the company's strategy. It also implies that the board is responsible for taking a long-term view and ensuring that management is doing so as well to the extent it deems necessary.

In its 2003 version of Redefining Materiality, AccountAbility specifically stated in the section titled "Governing Materiality"47 that each firm's board should define materiality within that firm's own context48 and not that of its peers. Because the board's fiduciary responsibility is to the corporation itself rather than any particular stakeholder group—even investors49—it needs to assess how various stakeholders' interests affect the corporation. Doing so requires understanding the issues that are material to each stakeholder and reflecting on how this shapes what is material for the firm itself. We suggest adding a prior step to the four-step process recommended by the IIRC for determining materiality: "Identify stakeholders relevant to the corporation, their interests (including where they conflict), and the relative weight attached to each."

Our recommended first step is rarely done with any degree of rigor for two reasons. The first is the prevailing ideology that the fiduciary duty of directors requires them to place primacy on shareholders' interests. As we have noted, this is indeed ideology, not law, at least in the very Anglo-Saxon-influenced United States.50 The second is that corporations and their boards are reluctant to define the relative importance of different members of the audience with great specificity. It is easier to say something general like, "We are committed to delivering excellent returns for our shareholders and we firmly believe that addressing stakeholders' interests further enables us to do so." While this sounds "nice" and is consistent with the emerging rhetoric in support of the "business case for sustainability," it ignores the fact that tradeoffs often exist, particularly in the short term.51 Since corporations often complain about the pressures for short-term performance imposed on them by the market, it is hard to reconcile this complaint with the breezy assertion of "doing well by doing good." Moreover, not only are there trade-offs between providers of financial capital and other stakeholders, there are tradeoffs between one type of provider of financial capital and another (e.g., equity vs. debt), as well as between different stakeholders (e.g., those focused on an environmental issue vs. those focused on a social issue).

Today the use of a "materiality matrix" by some companies to communicate their view about the relative importance of different issues begs the question of just how differences in importance are determined. What all members of the audience want to know is the underlying weighting given to each stakeholder group and the company's view of how important an issue is to each group. Since materiality is binary and based on judgment, judgment must first be exercised in identifying which members of the audience really matter. Doing so requires the courage to recognize that some stakeholders will disagree with this judgment, perhaps vocally so. Attempting to evade this conflict through conciliatory vagaries like "we care about all of our stakeholders" not only clouds the company's capacity to determine its material issues, but it also inhibits the company's ability to benefit from the transformation function of corporate reporting.52 Transformation requires stakeholder engagement and, as with every resource allocation issue, there are limits to the resources that can be devoted to this.

Determining the relative importance of different providers of financial capital and different stakeholders is ultimately a responsibility of the board. What does this mean in operational terms? We suggest that annually the board issue, as part of the company's integrated report, a forward-looking "Statement of Significant Audiences and Materiality." This statement will inform management, providers of financial capital, and all other stakeholders of the audiences the board believes are important to the survival of the corporation. While management can play a significant role in preparing this statement, it is ultimately a statement of the board, somewhat analogous to the annual financial audit. While management is deeply involved in the audit and, in the United States, the chief executive officer and chief financial officer must personally sign off on the adequacy of a company's internal control systems, it is the Audit Committee of the board that selects and engages the audit firm and signs off on the scope of the audit. The difference is that the audit statement is ultimately a responsibility of the board—not management.53

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