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As discussed in Chapter 2, the direct audience for, or "user" of, an integrated report is the "providers of financial capital." We also noted that while this typically signals providers of equity capital—investors—it should also include other types, like bondholders. In keeping with Holmes's call for a broad understanding of materiality, the <IR> Framework states in its section on "Materiality," "An integrated report should disclose information about matters that substantively affect the organization's ability to create value over the short, medium, and long term."32 In doing so, it implies a definition of materiality rather than explicitly stating one. Also in keeping with Holmes's call for narrowing judgment, the <IR> Framework goes on to discuss a four-step process to determine what information is material.

1. "Identifying relevant matters based on their value to affect value creation . . . ,

2. Evaluating the importance of relevant matters in terms of their known or potential effect on value creation . . .

3. Prioritizing the matters based on their relative importance . . .

4. Determining the information to disclose about material matters."33

Narrowing down a long list to what ultimately passes the materiality threshold for inclusion in the integrated report demands the exercise of judgment to separate the "material" from the "immaterial." The firm's ability to determine what is and is not material through its senior management and those involved in governance34 symbolizes its social agency. Since a given factor's relevance must be weighted by its importance to the company, "Judgment is applied in determining the information to disclose about material matters."35 While the firm may undertake an involved stakeholder engagement process, it makes the ultimate decision as to what is material to its strategy. In doing so, it exercises judgment as to what is both important and relevant to the user audience, and of equally symbolic importance, what is not relevant or important enough to report.

According to the <IR> Framework, stakeholders are the indirect audience of an integrated report. "An integrated report benefits all stakeholders interested in an organization's ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers,"36 it reads. Although not the direct audience, stakeholders can both influence what a firm determines is material (to the extent that their interests and actions affect providers of financial capital) and be members of the direct audience of report users (to the extent they are interested in a company's ability to create value over time). This is not the same as being interested in what the company is doing about issues that are material to them even if they are not determined to be material by the company.

More generally, it is common today for companies practicing integrated and/or sustainability reporting to distinguish between importance (or materiality) to the company and importance (or materiality) to society. This distinction is sometimes expressed through a "materiality matrix," a social construct whose meaning comes as much from how it is put together as its content. Too often, a misunderstanding about the difference between the entity and society levels of analysis muddles thinking on this subject.

Because we do not view society as an entity per se, and because materiality is an entity-specific concept, materiality cannot be defined for society. Society is a reified concept based on the agglomeration of entities that have more or less defined identities, such as NGOs, political organizations, employees, unions, communities, religious and civil society organizations, formal and informal networks, companies, and providers of financial capital. The different constituent parts of society which are entities can have their own views of materiality and how to determine it, just as a company can, does, and must. The firm can form its own view of what a stakeholder regards as material based on substantial input from that stakeholder or virtually none at all. However, the firm cannot determine what is material for the stakeholder any more than a stakeholder can determine what is material for the firm. By the same reasoning, one could also claim that the firm cannot determine what is material to the reasonable investor, to the providers of financial capital, and to the rest of the direct audience. The difference is that the law requires the firm to make this judgment regarding the "reasonable investor," but it does not address whether such a materiality determination is valid from a social construct point of view; firms are simply required to make this materiality determination.

While the fact that neither the firm nor its stakeholders can determine materiality for entities besides themselves seems obvious, the consequences of this distinction are enormous and often overlooked. Any attempt to identify what is material using an approach based on distinctions between what is "material to the company" and "material to society" confounds two very different concepts. The first is indeed materiality. The second is a firm's perception of what is important to society. Since society is not an entity with an identity, what the firm has really determined is not what is "material to society." Rather, it is reporting its own perception of what it thinks is important to society through a social construct based on an aggregation of its views about what is material to the stakeholders selected by the firm. How these stakeholders are chosen (and ignored), how their views are assessed, and the weightings the firm assigns to them in the aggregation function are part of the social construction process. The data modeling concept of "cardinality" applies here. As a social construct, the firm defines materiality in terms of its "one-to-one" entity relationship between the firm and the "providers of financial capital." Each party in this relationship is a defined entity, more or less. Between the firm and society, there exists a "one-to-many" relationship. "Many" is not an entity.

Because the company's stamp on "importance to society" is as strong as it is on "importance to the company," any stakeholder can argue that the company "did not get it right" in its determination of importance to society and, in doing so, cast doubt on the legitimacy of the company's assessment. This reflects the fundamental misunderstanding described in the previous paragraph. The firm is not—and should not think it is—providing an objective view of materiality from a stakeholder's, let alone society's, perspective. It is socially constructing its own view of what it thinks those stakeholders' views are. Stakeholders should recognize this for what it is, and they can attempt to change the company's perception if they do not agree with it.

In the same way that the firm cannot determine materiality for individual stakeholders, it cannot determine materiality for other firms—another indirect audience for an integrated report. In addition to suppliers and customers, other firms include competitors and potential competitors (who want to benchmark their performance against the firm's), potential acquirers (both strategic and financial buyers like private equity firms), and alliance or joint venture partners. While companies often include customers and suppliers in determining "importance to society," they almost never include other companies, thus making them unimportant in a discussion about materiality.

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