The test of materiality will make life harder for CSR reporters, Adrian Henriques argues
The UK government white paper Modernising company law suggests that all economically significant companies should publish an operating and financial review (OFR). This would enable an informed assessment about the company to be made covering social and environmental issues as well as financial performance. This sounds like good news for corporate social responsibility.
There are, however, one or two catches to the proposed approach. A key one is that the OFR is designed for investors to judge whether the company has considered all that it should in summarizing its performance. While an OFR may be of interest to stakeholders in general, it is not designed for them.
Even if we accept the enlightened shareholder perspective, there remains the question of what matters enough to be mentioned in an OFR. The Department of Trade and Industry has established a working group to review this issue of ‘materiality’. Its remit is to explore how ‘directors can assess whether an item is material to their company’ and so merit inclusion in an OFR.
Materiality is partly a question of scale. A few million pounds is almost irrelevant to a large multinational. But what is a human life worth? An economic view might be the sum for which the life was insured. It would follow that the loss of a human life is not, in itself, enough to merit mention in an OFR – although a legal battle, with its attendant poor PR, may raise the stakes.
Another problem is ‘to whom does it matter?’ Let us take an example. If a company wants to assist in building a dam which will displace thousands of people, does this matter? Probably not, unless some irritating non-governmental organization picks up the issue and it becomes a PR problem. That can affect business, so it might be judged material.
Of course it is not easy to set out rules for what is material to a company. To find out what is material to stakeholders, you must ask them. But it doesn’t work the other way round – to know what is material to a company, you can’t rely on the company’s opinion alone. Paradoxically, because of the power of stakeholders today, if as a company you only ask yourself what matters, you may miss critical stakeholder issues which could materially affect your company’s performance. The decision to require companies to produce an OFR will therefore make it more important than ever for them to find out what their stakeholders are thinking.
Stephen Timms, the UK minister for CSR, has said that the interests of stakeholders and those of the company are ‘the same thing’. This is a perceptive view – but it is a view of the world which as CSR practitioners we are striving to create, not the one we are faced with on Monday morning.