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MATERIALITY FORMS THE CONCEPTUAL bedrock of corporate reporting, yet no authoritative definition of it exists. In "Securities Regulation,"1 Louis Loss points out that the legal field offers no specific definition of the word. Court opinions on materiality have merely sketched its conceptual contours. Every time materiality has been relevant to a legal case in the United States, the court has opined that it must be decided on a case-by-case basis.2 The U.S. Supreme Court has also asserted that this determination must be based on both qualitative and quantitative factors based on the "total mix" of information made available.3 Further complicating the "total mix" standard set by the Supreme Court for evaluating potentially material omissions or misstatements, the Court left open the issue of "circularity" in its definition of materiality.4 Finally, the courts have also made clear that materiality must be determined with complete clarity. These opinions do not discuss "degrees" of materiality; materiality is binary. A fact is either material, in which case it should be reported, or is not material, in which case it does not need to be reported.

These "delicate assessments" are to be made by the corporation itself. Since investors have no voice in a company's materiality determination process other than through lawsuits (which lead to further guidance instead of specific answers), it is management's, and ultimately the board's, responsibility to ascertain what information its "reasonable investors" would want to know. In the end, materiality is determined by the corporation itself and it is entity-specific.5 While there may be no easy rule to follow in determining materiality, how companies go about making the ultimate decision of which externalities and issues are included in an integrated report should be a clearly defined process with solid lines of responsibility. The company's board of directors has the ultimate responsibility for putting in place a process that will enable it to make the final determination of what the company deems is material. In doing so, it establishes the legitimacy of the corporation's role in society.

In this chapter, we will not attempt to offer a precise definition of materiality. As accountant and historian Carla Edgley6 has shown, such crystallization of meaning is neither historically probable nor necessary for the term to accomplish what it should.7 There is also evidence that cultural context influences the meaning of materiality.8 Rather than pin the idea down, this chapter seeks to widen our understanding of what materiality is by reviewing how it has been treated in the worlds of financial and nonfinancial reporting. In scrutinizing the assumptions and historical precedents upon which the notion of materiality is based, we will show how integrated reporting materiality should be determined by focusing on who should define materiality and for whom it is determined.


Although materiality forms the conceptual bedrock of corporate reporting, it is ultimately a social construct. In The Construction of Social Reality, philosopher John Searle observes that society's institutional structures share a special feature of social construction: symbolism.9 The United Nations, Harvard University, the New York Stock Exchange, Rolex, the Red Cross, and Apple, for example, signify something beyond the sum of their parts. Their symbolic value is similar to brand power in that the mere mention of these institutions conjures expectations beyond what can be explained by their present "assets" and activities. As Apple is not the only company that makes innovative, imaginative products with attractive design, its products alone cannot explain the company's public monopoly on that combination of attributes or the fact that Forbes ranked it the world's most valuable brand in 2013.10 The fragmented body that is society projects meaning onto these institutions. Because societal agents like judges, commissioners, legislators, trustees, and board members consciously and intentionally foster this symbolism by reinforcing the reputation of these institutions, it can be said that these institutions are socially constructed: they exist only to the degree that meaning is shared between a given institution and its audience. Thus, meaning can exist without definition and, conversely, definition does not confer meaning.

Consider fraud. Fraud is analogous to materiality in its treatment by the courts. Like fraud, materiality does not lack for meaning in that people generally have a sense of what qualifies, but it has notoriously evaded definition for practical reasons. Loss wrote, "The courts have traditionally refused, whether at common-law deceit, or under securities laws, to define fraud with specificity."11 Similarly, materiality is grounded in law that specifies that its meaning must be defined in practice by the particular circumstances of the company. In this spirit, the accountant William Holmes encouraged us to "continue to discuss, dispute, dissect, deplore, and generally 'look before and after and pine for what is not' in this matter of materiality," concluding that the solution is to "widen our understanding and narrow our judgments—short of official standards."12 We take this to mean that rather than looking for an ultimate definition, we should instead focus on how to exercise judgment to determine what is material on a case-by-case basis.

Because materiality is a firm-specific social construct, it poses certain challenges for the integrated reporting movement. Since every board and management team protects a unique brand, what the corporation symbolizes for society is unique to each firm. The judgment of which limited matters are, in the language of the International Integrated Reporting Council (IIRC), "relevant and important,"13 is also firm-specific. As each firm can define its own materiality threshold within the boundaries of accepted and evolving standards, our understanding of materiality must encompass all integrated reporting firms. In "Westphalian"14 terms, materiality for the firm becomes materiality for its audience.

Regardless of whether or not its wishes are heeded, the involvement of an "audience" begs the question of to whom the firm is reporting. Recalling Searle, a social construct like materiality is a form of human agreement that involves the capacity of an institution, or more specifically its agents, to symbolize it. In the context of materiality for integrated reporting, one must ask, "Whom do the institution's agents address when they determine which issues are material, and which issues are not?"

Although providers of financial capital form the "direct audience"15—that is, the "users"—of an integrated report, the "indirect audience" of stakeholders also exerts pressure on the firm's selection of material issues. Firms are driven to engage with stakeholders because stakeholders wield varying degrees of influence on the providers of capital, and the implications of that influence are often too great to ignore. Consequently, when the firm decides what information is material, it must, for its own good, take into account the perspectives of stakeholders beyond those who provide financial capital.16 Furthermore, as Berle and Means17 have argued, society has granted corporations special privileges not given to individual persons, which suggests these same corporations have a moral, if not a civic, duty to think beyond profits to consider the good of society. Logically, corporations would then be morally obliged to not only "perform" in such a way, but to report back to society "material actions" beyond the profit-driven.

This does not mean, however, that issues that are "material" to stakeholders will be material to the firm. In the end, the corporation as represented by its board of directors will determine what is material for reporting purposes. In doing so, it chooses which stakeholders to address, how to obtain their input, and the relative weightings to assign to issues and audience members. The next chapter explores this in more detail in terms of the concept of a "Materiality Matrix" or, for reasons we will explain, what we prefer to call the "Sustainable Value Matrix." Here we will briefly use the case of environmental reporting to introduce a more general discussion about how materiality has been treated in the worlds of financial and nonfmancial reporting, compare the two, and then give our view of this concept's relevance for integrated reporting.

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