Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality

by Robert G. Eccles & Tim Youmans

Overview — Contrary to common belief, a board’s duty is to the interests of the corporation itself rather than the particular audience of shareholders. While the board can choose to deem shareholders as the only significant audience, it does not have to do so. The board must decide which audiences are most significant for the ability of the corporation to create value over the short, medium, and long term. Then it can lay the foundation for improved corporate reporting.

Author Abstract

Under the prevailing ideology of "shareholder primacy" most boards of directors believe that they are prevented from considering stakeholders other than shareholders in determining material issues and materiality for strategy and reporting. New research is showing that legal foundations exist for directors to indeed consider other stakeholders. To many boards, this is new thinking. In order to assist boards in this new realm of taking into account multi-stakeholder significance, we have structured this paper in four parts and a conclusion. In Part I, we review fiduciary duty focusing on to whom this duty is owed. In Part II, we review the relevance of materiality in corporate governance. In Part III, we review our audience-focused materiality determination approach, and in Part IV, we discuss the new idea of an annual board "Statement of Significant Audiences and Materiality." We conclude with some preliminary research results, ideas for future research, and next steps.

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