Evidence shows that the investor audience has a significant latent appetite for integrated reporting. The Statement of Significant Audiences and Materiality, when combined with the new tools we outline in the next chapter, may be a vehicle that accelerates the adoption of integrated reporting by this user audience. According to a 2014 Ernst & Young survey on "Tomorrow's Investment Rules," institutional investors want a clearer view of what is material and want it directly from the company.

Materiality is a key concept that emerged from this survey. Investors were more likely to value information which came directly from the company itself rather than from third-party sources. In addition, among those that never consider ESG information in their decisionmaking process, the main reason for rejecting it was that they felt it was not material.54

When the board is very clear in its communication of what is material and what is not, and which audiences it feels are significant (and which are not), investors gain relevant guidance on how the board judges importance and its ability to exercise this judgment. Investors are looking for this guidance. The board's Statement of Significant Audiences and Materiality is a new venue through which the board can strengthen the social construction attribute of institutional symbolism. This symbolism, which makes clear what the company cares about and what it does not, is the foundation for the verity of the company's claims about its commitment to "sustainability." It is an important way in which the company avoids the charge of "greenwashing," but the company must also back up its claims about the audience and issues that are material and so included in their integrated report, with genuine resource commitments and stakeholder engagement, as discussed in the next chapter.

The board itself will determine the process for producing this statement using whatever tools and guidelines it chooses, while heeding the IIRC's guidance on concision in materiality. Selecting 10 audiences to include in the statement communicates more information than selecting 20, and selecting 5 audiences transmits more information than selecting 10. We suggest the following resources to aid the board in drafting its Statement of Significant Audiences and Materiality:

The IIRC has established a process for determining materiality, which we have augmented as discussed above.

SASB's rigorous, sector-specific, evidence-based standards are a good starting point for identifying ESG issues relevant to investors.

- GRI offers similar guidance regarding issues for stakeholders, and the board should determine which are material for the corporation itself.

- CDP provides the key perfomance indicators for reporting on climate, water, and forest issues that the board deems material.

In the previous chapter, we discussed more generally the way that the efforts of these four organizations are complementing each other in support of the integrated reporting movement. In the next chapter, we will discuss how the board's "Statement of Significant Audiences and Materiality" serves as the foundation for a management tool we call the "Sustainable Value Matrix."


1. Loss, Louis. Securities Regulation. New York: Little, Brown and Company, 1961.

2. "It is said that a fraudulent representation must be material to have that effect. But how are we to decide whether it is material or not? It must be by an appeal to ordinary experience to decide whether a belief that the fact was as represented would naturally have led to, or a contrary belief would naturally have prevented, the making of the contract." (Holmes, Oliver Wendell. "The common law." (1881) in Gutenberg Project version: [308] LECTURE IX. CONTRACT.- III. VOID AND VOIDABLE.) This is one of the first commercial law references to materiality. Later cases such as Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988) and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S. Ct. 2126, 48 L. Ed. 2d 75 7 (1976), as well as post-Securities Act regulations, arguably, stand on the shoulders of Holmes's legal construction of commercial materiality.

3. "... a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of the information made available." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976) at 449.

4. The circularity of this [TSC v. Northway] definition leaves the question of what determines the "total mix" of information unanswered. Does it refer to all other material information except for the piece in question? If so, upon what basis was all this information judged to be material in the first place, since the "total mix" of information must be constructed one piece at a time? Was the first piece of information deemed material because it was important to a reasonable investor, and then all other information is judged in the context of increasing amounts of information? Conceivably, whether a piece of information is material or not would be a function of how much other information is available. When little information is available, the relevance of an additional bit of information can be high. When a substantial amount of information is available, an additional piece may be less relevant. If the total mix of information also includes immaterial information, then the question arises regarding the basis on which the total mix is built.

5. The phrase "entity-specific " is used in the Financial Accounting Standards Board definition of materiality. "Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity's financial report. Consequently, the Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation." Financial Accounting Standards Board. Statement of Financial Accounting Concepts No. 8, p. 17, blobnocache=true &blobwhere=1175822892635&blobheader=applic ation % 2Fpdf&blobheadername2 = Content-Length&blobheadernamel = Content-Dis position & blobheadervalue2 = 210323 & blobheadervalue 1=filename % 3DCon cepts_Statement_No_8.pdf&blobcol=urldata&blobtable=MungoBlobs, accessed May 2014. For another discussion on materiality for nonfinancial information see, Eccles, Robert G., Michael P. Krzus, and George Serafeim. "A Note on Materiality for Nonfinancial Information." Harvard Business School Note N9-314-033, November 2013.

6. We would like to cite the work of Carla Edgley, Lecturer in Accounting and Finance Cardiff Business School, for her excellent compendium of sources on accounting materiality in her paper: Edgley, Carla. "A genealogy of accounting materiality." Critical Perspectives on Accounting (2013). All integrated reporting movement participants and materiality scholars will find this paper an excellent foundation for future research into the application of materiality beyond financial accounting into integrated reporting, as did we.

7. Also, nonfinancial reporting materiality is inherently less historical and more forward-looking than financial materiality. In Solomon, Jill, and Warren Maroun. "Integrated reporting: the influence of King III on social, ethical and environmental reporting." (ACCA, 2012), p. 8: "In practice, the materiality of sustainability-related information is notoriously difficult to establish. Placing a financial value on materiality for financial risks is a complex process but establishing materiality and materiality thresholds for traditionally 'non-financial' risks, which are hard to quantify, is far more challenging if even possible. . . . 'The string of corporate collapses over the past decade has led many stakeholders to question the relevance and reliability of annual financial reports as a basis for making decisions about an organisation. Reports based largely on financial information do not provide sufficient insight to enable stakeholders to form a comprehensive picture of the organisation's performance and of its ability to create and sustain value, especially in the context of growing environmental, social and economic challenges. Sustainability reports have similarly suffered weaknesses, usually appearing disconnected from the organisation's financial reports, generally providing a backward-looking review of performance, and almost always failing to make the link between sustainability issues and the organisation's core strategy. For the most part, these reports have failed to address the lingering distrust among civil society of the intentions and practices of business. Stakeholders today want forward-looking information that will enable them to more effectively assess the total economic value of an organisation' (Mervyn King's Foreword, IRCSA 2011:1)." "At a meeting of key sustainability reporting role players, held at St James Palace by Prince Charles in 2009 [author Krzus attending], Mervyn King shared the realisation that came of age: 'Corporate reporting as we've been doing it for the last decade is no longer fit for purpose. With the complexity of reporting, nine out of ten people do not understand it. What you need is concise international language so that the trustee of your pension fund can make an informed investment about your money that is invested in that company, that it's going to sustain value creation in the long return. You cannot tell that by looking at a balance sheet or profit and loss statement. In the nature of things that is historical information. You're trying to look into the future when looking at sustained value creation within the completely changed world in which we operate. Climate change, ecological overshoot and overusing the natural assets of the planet—all these things are happening around the world."' "Interview Summary Report." Compiled by Jess Schulschenk in collaboration with the Albert Luthuli Centre for Responsible Leadership at the University of Pretoria. Published by Ernst & Young South Africa. August 2012. p. 23. 8. New evidence indicates there may be significant differences in the meaning of materiality between countries. We entered "materiality" into the Google Correlate tool, and then subjectively selected the most relevant among the 30 most highly correlated search terms between January 2004 and April 2014. The most highly correlated, relevant terms for the USA were: income statement, balance sheet, sociocultural theory, and elasticity of demand, together having an approximate mean R2 of 0.92. Results for India, U.K., Canada, Australia, and New Zealand showed a significant diversity in meaning, both from the U.S. and between each other, along with a general, and apparently significant, decrease in correlation. This suggests a need for future research into national differences in the perceived meaning of materiality. Non-USA results follow (approximate mean R2 in parentheses). India (0.90): accounting journal, positive words, account department, spending money, management roles. U.K. (0.85): subjective, definite, to analyse, discuss, a matrix, socially, normative. Canada (0.83): journal entry, the standard deviation, extrapolate, doubtful accounts, perceive, empathy. Australia (0.80): stakeholder analysis, behaviour change, critical appraisal, social learning theory, a firm. New Zealand (0.76): an organization, calculate standard deviation, an asset, the individual, a matrix. 9. Searle, John R. The Construction of Social Reality. New York: Simon and Schuster, 1995.

10. Badenhausen, Kurt. "Apple Dominates List of the World's Most Valuable Brands." Forbes online. November 6, 2013. Accessed online at www on May 1, 2014.

11. Loss continues: "Were any hard and fast rule to be laid down as to what constitutes fraud under the blue-sky law, the Oregon court has said, 'a certain class of gentleman of the J. Rufus Wallingford type . . . would lie awake nights endeavoring to conceive some devious and shadowy way of evading the law. It is more advisable to deal with each case as it arises." (Loss, "Securities Regulation." (1961), p. 143 6.) "Common law deceit" used here as it refers to the broad body of case law and other governing prohibitions against lying, cheating or stealing in civil society, whereas "securities law" refers more specifically to prohibited deceptive practices as defined in the Securities Act of 1956, its successor Acts and implementing regulations, and to case law precedents related to this Act.

12. Holmes, William. "Materiality - Through the looking glass." Journal of Accountancy, 133, no. 2 (1972): 44-49.

13. International Integrated Reporting Council. "Materiality background paper for <IR>," pp. 2-8.

14. In academic circles, the phrase "Westphalian Sovereignty" is sometimes summarized as "The religion of the prince is the religion of the place." Arguably, the source of the concept of "sovereignty," the Peace of Westphalia of 1648 was: "The end of the Thirty Years War brought with it the final end of the medieval Holy Roman Empire. Authority for choosing the religion of the political unit was given to the prince of that unit and not to the Hapsburg Emperor or the Pope. No longer could one pretend there was religious or political unity in Europe. Authority was dispersed to the various kings and princes, and the basis for the sovereign state was established." Russett, Bruce, Harvey Starr, and David Kinsella. World Politics: The Menu for Choice. Cengage Learning, 2005.

15. We will refer to the direct audience of integrated reporting as "users."

16. International Integrated Reporting Council. "The International <IR> Framework," p. 18.

17. Berle, Adolf Augustus, and Gardiner Coit Means. The Modem Corporation and Private Property. Transaction Publishers, 1991 (10th version, original published in 1933). pp. 69, 120-121, 250-251.

18. The message about materiality and material issues in the European Union directive on disclosure of nonfinancial and diversity information is muddled. Section 3, LEGAL ELEMENTS OF THE PROPOSAL, Detailed Explanation of the Proposal, Nonfinancial information, states, "Article 1 (a) of the proposal will require certain large companies to disclose a statement in their Annual Report including material information relating to at least environmental, social, and employee-related matters, respect of human rights, anti-corruption and bribery aspects." However, the word "material" is not used in the text of amendments to either Article 46 or Article 36. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of nonfinancial and diversity information by certain large companies and groups. www =0207&extension=null&appLng=EN, accessed April 2014. (Site discontinued).

19. Securities and Exchange Commission. News, Press Releases, SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change, htm, accessed April 2014.

20. Securities and Exchange Commission. "Commission Guidance Regarding Disclosure Related to Climate Change," 17 CFR Parts 211, 231 and 241 [Release Nos. 33-0106; 34-61469; FR-82], Securities and Exchange Commission, February 2, 2010, p. 2 7,, accessed April 2014.

21. Ibid., p. 12.

22. Ceres was founded by a small group of investors in 1989 in response to the Exxon Valdez oil spill. The organization is an advocate for sustainability leadership. Ceres mobilizes a powerful network of investors, companies, and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy. Ceres. About Us, Who We Are,, accessed April 2014.

23. The key findings of a February 2014 report by Ceres were (1) the SEC is not prioritizing the financial risks and opportunities of climate change as an important disclosure issue; (2) the SEC issued 49 comment letters that addressed the adequacy of climate change disclosure in 2010 and 2011, but only three comment letters in 2012 and none in 2013; (3) most S&P 500 climate disclosures in 10-Ks are very brief, provide little discussion of material issues, and do not quantify impacts or risks; (4) most S&P 500 companies that disclose via the CDP provide significantly more detailed information in voluntary climate reporting compared to mandatory 10-K filings; and (5) a large number of companies fail to say anything about climate change in their annual filings with the SEC. Forty one percent of S&P 500 companies did not include any climate related disclosure at all in their 10-K filings in 2013. Ceres. Resources, Reports, Cool Response: The SEC & Corporate Climate Change Reporting,, accessed April 2014. 24. The SEC assumes the "rational investor" in its materiality guidance and rules, an assumption which should be questioned given recent research in behavioral economics. It is fair to assume that a reasonable investor is seen as making decisions based on classical microeconomic theory regarding perceptions of risk and return. In this theory, a "rational" man (or woman) has a linear utility function for the tradeoffs between risk and reward. However, a growing body of academic research in the field of behavioral economics is showing that the rational man or woman does not exist. Instead "behavioral man," specifically evidenced in investor and manager behaviors, has an S-shaped utility curve that is asymmetric about the origin. According to the branch of behavioral economics known as "Prospect Theory," actors in the domain of gains are somewhat more "risk averse" than explained by rational man theory. Conversely, investors and managers already in the domain of losses are significantly more risk seeking than explained by the rational model. Tversky, Amos, and Daniel Kahneman. "Advances in prospect theory: Cumulative representation of uncertainty." Journal of Risk and Uncertainty 5, no. 4 (1992): 297-323.) Barbara Black (2012) has pointed out the implications of this new research for federal securities regulation in her 2012 paper, "Behavioral Economics and Investor Protection," reframing the "reasonable investor": "The judicial view of a 'reasonable investor' plays an important role in federal securities regulation, and courts express great confidence in the reasonable investor's cognitive abilities. Behavioral economists, by contrast, do not observe real people investing in today's markets behaving as the reasonable investors that federal securities law expects them to be. Similarly, the efficient market hypothesis (EMH) has exerted a powerful influence in securities regulation, although empirical evidence calls into question some of the basic assumptions underlying EMH. Unfortunately, to date, courts have only acknowledged the discrepancy between legal theory and behavioral economics in one situation, class certification of federal securities class actions. It is time for courts to address the gap between judicial expectations about the behavior of reasonable investors and behavioral economists 'views of investors' cognitive shortcomings, consistent with the central purpose of federal securities regulation: protect investors from fraud." Black, Barbara. "Behavioral Economics and Investor Protection: Reasonable Investors, Efficient Markets." Loyola University Chicago Law Journal, 44 (2013): 1493-1509.

25. Ibid., pp. 21-27.

26. Ribstein, Larry. "The SEC, Global Warming, and the First Amendment." Forbes. February 1, 2010.

27. Hirji, Zahra. "Most US Companies Ignoring SEC Rule to Disclose Climate Risks." Inside Climate News. September 19, 2013. insideclimatenews .org/news/20130919/most-us-companies-ignoring-sec-rule-disclose-climate-risks, accessed April 2014.

28. SASB's reference to "total mix" is nuanced. "Materiality is a fundamental principle of financial reporting in the United States. The concept of materiality recognizes that some information is important to the fair presentation of an entity's financial condition and operational performance. Federal securities law seeks to protect individual investors by requiring publicly listed companies to disclose annual and other periodic performance information that would be necessary for a reasonable investor to make informed investment decisions. U.S. Federal law requires publicly listed companies to disclose material information, defined by the U.S. Supreme Court as information presenting 'a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.' (TSC Indus. V. Northway, Inc., 426 U.S. 438 (1976)). Both U.S. and global companies that trade on U.S. exchanges are subject to Federal disclosure requirements. Regulation S-K, which sets the specific disclosure requirements associated with Form 10-K and other SEC filings, requires that companies describe known trends, demands and uncertainties that have a material impact on financial results in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of Form 10-K." Sustainability Accounting Standards Board. "Approach, Materiality, Why is it Important?," materiality/important/, accessed April 2014.

29. "The International Financial Reporting Standards Framework describes the basic concepts that underlie the preparation and presentation of financial statements for external users." Deloitte. XJSGAAPPlus, Standards, Other pronouncements, Framework, Conceptual Framework for Financial Reporting 2010,, accessed April 2014. "Concepts Statements are intended to set forth objectives and fundamental concepts that will be the basis for development of financial accounting and reporting guidance. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting—concepts that guide the selection of transactions and other events and conditions to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties." Financial Accounting Standards Board. Standards, Concepts

Statements, Conceptual Framework for Financial Reporting, fasb .org/jsp/FASB/Page/PreCodSectionPage&cid=1176156317989, accessed April 2014.

30. "The only direct reference we [SASB] have to CDP's work is through reference to the CDP questionnaire and the CDSB framework in several of our standards in the Nonrenewable Resource Sector." Andrew Collins, email correspondence with Robert Eccles, Mike Krzus, Tim Youmans, and Katie Schmitz Eulitt, April 23, 2014. Under the terms of a Memorandum of Understanding, SASB utilizes CDP's data as evidence for determining the materiality of climate change-related issues in certain industries. SASB also receives technical assistance in referencing CDSB protocols for disclosure of carbon emissions.", accessed April 2014.

31. Under the terms of a Memorandum of Understanding between Global Reporting Initiative and the CDP, the organizations agreed to collaborate to avoid duplication of disclosure efforts. "[It] will improve the consistency and comparability of environmental data, making corporate reporting more efficient and effective and ease the reporting burden for the thousands of companies" that use CDP's climate change and supply chain programs and GRI Sustainability Reporting Guidelines. This will be achieved by allowing data points to be used in both reporting channels. The information provided through either channel can form parts of a sustainability report using GRI Guidelines and/or to answer parts of CDP questionnaires. A support document outlining how this can be applied will be published in early 2014. As with greenhouse gas emissions reporting, GRI and CDP strive for similar alignment related to water reporting. Both organizations will coordinate their technical processes in the coming months and years in order to help streamline the global water reporting approach. Global Reporting Initiative. About GRI, Alliances and Synergies, information/about-gri/alliances-and-synergies/Pages/CDP.aspx, accessed April 2014.

32. "The International <IR> Framework," Guiding Principles 3.17, p. 18.

33. Ibid., Guiding Principles 3.18, p. 18.

34. The International Integrated Reporting Council. "Materiality: Background Paper for <IR>," p. 2, 03/IR-Background-Paper-Materiality.pdf, accessed March 2014.

35. Ibid., p. 19.

36. "The International <IR> Framework," p. 7.

37. IIRC, Materiality: Background Paper for <IR>, p. 1.

38. " 'In the time to come this volume may be proclaimed as the most important work bearing on American statecraft . . . and will mark a sharp turning point in fundamental, deep-thrusting thinking about the American State and American civilization."' Few books receive reviews like this in the New York Herald Tribune [Charles Beard, "'Who Owns—and Runs—the Corporations'," February 19, 1933, book review section], and still fewer that are academic research monographs. But so a book that was destined to establish a new field of scholarship was greeted with its publication in 1932. 'This book will perhaps rank with Adam Smith's Wealth of Nations as the first detailed description in admirably clear terms of a new economics epoch"' [Frank, Jerome and Norman Meyers, 1933, Yale Law Review, 42, 989-1000]. Mayer, Colin. Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It. Oxford University Press, 2013, pp. 71-72.

39. Berle and Means. The Modern Corporation and Private Property.

40. The ability to limit liability, through bankruptcy protection, is common to sole proprietors, closely held companies, and individuals, as well as corporations. A key difference is that the corporation's control group (officers and directors) are able to socialize the losses on others' capital investment, not their own capital investment.

41. From American and English law, "the very existence of the corporation was conditioned on a grant from the state. This grant created the corporation and set it up as a separate legal person independent of any associates [investors and managers]," [also contemporarily termed "corporate personhood."] From this state granted personhood "privilege . . . flowed a limited liability of associates ... a stockholder was not liable for any of the debts of the enterprise and he could thus embark a particular amount of capital in the corporate affairs without becoming responsible, beyond this amount, for the corporate debts." Berle and Means, The Modern Corporation and Private Property, pp. 120-121. Regarding the role of limited liability in attracting risk capital in Easterbrook, Frank H., and Daniel R. Fischel. "Limited liability and the corporation." U. Chi. L. Rev. 52 (1985): 89. p. 636, "Third, limited liability enables the transfer of securities on a trading market, ensuring liquidity. Absent limited liability, shares would be difficult to value because they would carry the potential of excess liabilities." The role of limited liability in attracting risk capital has also been shown mathematically in Merton, Robert C. "An Intertemporal Capital Asset Pricing Model," Econo-metrica, Vol. 41, No. 5 (Sep. 1973), which concludes on p. 885 that "An intertemporal model of the capital market has been developed which is consistent with both the expected utility maxim and the limited liability of assets [equities]."

42. Also derivative of corporate personhood, corporations can exert "Control Through a Legal Device. In the effort to maintain control of a corporation without ownership of a majority of its stock, various legal devices have been developed. Of these, the most important among the very large companies is the device of 'pyramiding.' This involves the owning of a majority of the stock of one corporation which in turn holds a majority of the stock of another—a process which can be repeated a number of times. An interest equal to slightly more than a quarter or an eighth or a sixteenth or an even smaller proportion of the ultimate property to be controlled is by this method legally entrenched." Berle and Means, The Modem Corporation, p. 69.

43. "The separation of ownership from management and control in the corporate system has performed this essential step in securing liquidity. It is the management and 'control' which is now wedded to the physical property. The owner has no direct personal relation to it and no responsibility toward it. The management is more or less permanent, directing the physical property which remains intact while the participation privileges of ownership are split into innumerable parts ["dispersed ownership"]-" shares of stock"-which glide from hand to hand [as a "token"], irresponsible and impersonal . . . Most striking of all, a liquid token acquires a value purely and simply because of its liquidity." Berle and Means, The Modern Corporation, pp. 250-251. As cited above, the separation of ownership from control combined with personhood-derived limited liability enables the free trading of shares and liquid market for these shares.

44. Berle and Means, The Modem Corporation, p. 5.

45. Stout, Lynn {The Shareholder Value Myth, 2012) describes that the foundation of the "profit maximizing," thus stakeholder minimizing, corporate governance is the self-disproving view of social interaction symbolized by "Homo economicus": "Let us see how our friend Homo economicus stacks up against the list [of clinical sociopathic behaviors]. Lack of remorse (item 7)? Obviously; why would Homo economicus feel bad just because he hurt or misled another, if he advanced his own material welfare? Irresponsibility and reckless disregard for the safety of others (items 5 and 6)? Homo economicus feels responsible for, and cares about, no one but himself. Deceitfulness (item 2)? Homo economicus is happy to lie any time it serves his interests. Failure to conform to social norms with respect to lawful behaviors (item 1)? Whenever and wherever the police aren't around describes Homo economicus. Although Homo economicus is neither cranky nor impulsive—items 3 and 4—he has five of the seven characteristics on the list. Unburdened by pity or remorse, he will lie, cheat, steal, neglect duties, break promises—even murder—if a cold calculation of the likely consequences leads him to conclude that he will be better off. Like any sociopath, Homo economicus lacks a conscience." It is clear that most modern corporate board members are not Homo economicus, and it is within the norms of the modern corporate social construct to reciprocate back to society, beyond pure profit making. Stout, Lynn A. "Taking conscience seriously." Moral Markets: The Critical Role of Values in the Economy. Princeton University Press, Princeton (2007): 157-172.

46. Specifically, Mayer advocates a two-tier form of board governance called a "trust firm," somewhat similar to the German Board model (Franks, Julian R.

and Mayer, Colin, "Ownership and Control of German Corporations" (October 2001). Review of Financial Studies, Vol. 14, Issue 4, pp. 943-977, 2001.) . Given that the trust firm is not (yet) the standard in the United States and other corporate domiciles, we feel that Mayer's "trust theory of the stratified Board" applies to today's current directors: ". . . the corporation is a rent extraction vehicle for the shortest term shareholders. The power of owners [controllers] with the shortest time horizon not only concentrates control and wealth amongst them and their agents, but also is the source of failure to account for the interest of any generation but their own. Competition may confer some benefits on their customers, but by focusing the horizon of the firm so closely on the near term, the wellbeing of all but the most immediate generation is disregarded. We should not therefore rely on competition to be the guardian of our offspring . . . [The corporation will have to turn to trustees who are the custodians of the firm's values] to restrain it from defaulting in the future. . . . Their presence changes the nature of the corporation from being a pure agency one, in which the directors act as agents of the shareholders, to a mixed trust arrangement in which the [board] acts in behalf of the designated stakeholders of the corporation." Mayer, Firm Commitment, pp. 240, 244-245. It is our belief that these stakeholders are the material and significant audiences that the firm defines and in its integrated reporting process.

47. Zadek, Simon, andMiraMerme. "RedefiningMateriality." AccountAbility, 0Materiality% 20-%20Full%20Report.pdf, accessed May 2014.

48. Findings from behavioral economics, previously cited in this chapter, may have implications for how boards determine materiality, by including consideration of whether the information would be perceived as positive or negative as they make judgments on materiality and significance. This is a major conceptual change since none of the discussion above considers valence as a factor in determining materiality.

49. "The Misleading Metaphor of Shareholder 'Ownership' . . . describes shareholders as 'owners' of corporations. As a legal matter, the claim that shareholders 'own' the corporation is obviously incorrect. Corporations are independent legal entities that own themselves; shareholders only own a security, called 'stock,' with very limited legal rights." [Footnote on p. 804: "This metaphor may have roots in the nineteenth century, when most corporations were closely held firms with only a single shareholder or a very small number of shareholders. In such firms, shareholders exercise far more control, and it may make more sense to think of them as owners."] "The Mythical Benefits of Shareholder Control." Stout, Lynn A., Virginia Law Review, Vol. 93, No. 3 (May, 2007), p. 804,

50. "In other words, once again beyond legal requirements, the interests of others, including human rights, derive from those of the corporation's shareholders. So the argument for shareholder value has been profoundly influential in shaping the laws and conventions that govern the conduct of our corporations. So elegant is the argument that I will employ it in coming to the exact opposite conclusion (pp. 31-32) . . . Shareholder value is an outcome not an objective. It should not drive corporate policy but be treated as a product of it. (p. 261)" Mayer, Colin. "Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It." (2013). Also see Stout, Lynn "The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public." (2012)

51. Eccles, Robert G. and George Serafeim. "The Performance Frontier: Innovating for a sustainable strategy." Harvard Business Review 91, no. 5 (2013).

52. "Corporate reporting serves another function, what can be termed the 'transformation function.' While the information function assumes no feedback from counterparties, the transformation function relaxes this assumption, allowing for engagement and activism from the counterparties. The counterparties receive and evaluate the information. Where they see opportunities to influence corporate behavior to their benefit, and potentially to the benefit of the corporation, they actively try to bring about change. This engagement, activism, and change process enables a company to transform. The transformation function does not assume that the information function is performed effectively. In many cases, counterparties engage and bring change under conditions of incomplete information. For example, NGOs like Global Reporting Initiative (GRI) and Transparency International (ТІ) engage with corporations to improve disclosure. Their engagement efforts are frequently exerted with incomplete, if any, information. It is natural to think, though, that counterparties will spend their efforts more productively if they are better informed." Eccles, Robert, and George Serafeim. "Corporate and Integrated Reporting: A Functional Perspective." Harvard Business School Working Paper, No. 14-094, April 2014.

53. Sarbanes-Oxley Act of 2002, PL 107-204, 116 Stat 745, Section 301, Paragraph 2: "RESPONSIBILITIES RELATING TO REGISTERED PUBLIC ACCOUNTING FIRMS. —The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee."

54. E&Y. "Tomorrow's investment rules: a global survey." p. 2, ey .com/Publication/vwLUAssets/EY-Institutional-Investor-Survey/$FILE/EY-Institutional-Investor-Survey.pdf, accessed May 2014.

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