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.
