4.1.2.1 The “Statement of Significant Audiences and Materiality” and the “Sustainable Value Matrix tool”

As an introductory note to this point, I do not intend to go into the topic of the “social responsibilities of businesses” and the extensively debated shareholder versus stakeholder primacy. However, the research conducted by Harvard’s professors Robert Eccles and Tim Youmans have brought a new light into the stakeholder’s view, showing that this view may favor sustainability. As explained below, the further development of a sustainability reporting framework may be a subject to consider.

Friedman’s shareholder’s primacy has been the single corporate material focus and responsible for inhibiting the inclusion of other stakeholders’ interests in a company’s strategy and reporting. The boards of directors have long believed in the idea that their fiduciary duty was primarily to the company’s shareholders.1 This is purely an ideology and not a legal requirement.2In result, boards of directors have been primarily focused on the short-term financial results of the company. The generation of financial profit is not the main objective of the corporation but solely an outcome of the corporation’s activities.3 This idea has been replaced and recent research has shown that the corporation has the objective to survive and when possible to thrive and not to increase shareholder value only.4 As explained below in section 2 of this chapter, the IIRC has identified six capitals, the financial, manufactured, intellectual, human, social and relationship, and natural capital. Each of these capitals has different audiences who have their interests in each of the capitals. Recent research looked at varied jurisdictions and found out that with no exception, the board of directors has a primary duty to the corporation itself as a separate legal person, and not to the shareholders only.5

Leading law firms in all the G20 countries together with 14 other countries have published legal memos clarifying that the primary duty of the board is to the long- term interests of the corporation as a separate legal entity and there are no legal obstacles for the board to identify significant audiences that go beyond shareholders.6 Legally it is actually in the interest of the directors to consider other significant audiences if the board believes these audiences will affect the company’s long-term ability to survive and prosper.7 Once responsible for the management of the company’s assets, the board of directors need to determine which issues are relevant to the company’s strategy, in other words which issues are material to the long-term viability of the business. Fiduciary duty has been understood by directors has the duty of putting the interests of shareholders and the corporation first (American Bar Association, 2015).8 The misperception of shareholder primacy as a legal requirement, has led directors to concentrate on the interests of the shareholders and consequently underestimating the interests of other stakeholders. Materiality should ultimately be decided by the board of directors, as it is sector specific and based on judgment.9 In the Ernst & Young’s survey “Global Institutional investor survey 2015 – Investment rules 2.0: nonfinancial and ESG reporting trends”, mandatory board oversight of sustainability reporting was considered essential or important by 80% of the surveyed.10 Materiality is not a static concept and it changes with the evolving needs of the reasonable investor and how investors need to understand how a company is positioned (Jean Rogers, SASB’s CEO).11

Harvard Professor Robert Eccles’ research has suggested a step to improve the misperception of the board of directors’ fiduciary duty, by yearly publishing a one- page “Statement of Significant Audiences and Materiality” and a Sustainable Value Matrix tool that translates the statement into management decisions.12 In this one- page length statement the board of directors communicates whether sustainability is important for the company, which are the significant audiences (other stakeholders) beyond the shareholders and expected time frame.13 This document is the basis for developing a long term sustainable strategy and to show how the company is contributing to society.14 By concentrating their focus only on their significant audiences, companies have better financial performance than those who don’t have this governance focus (Harvard Business School Professor George Serafeim).15 The boards of directors of listed companies are called to publish an annual Statement of Significant Audiences and Materiality by 2025.16