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HARVARD | BUSINESS | SCHOOL The Statement of Significant Audiences and Materiality Campaign A Collaboration of the American Bar Association’s Task Force on Sustainable Development and the UN Global Compact Under the Guidance of Robert G. Eccles and Tim Youmans Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Executive Summary Materiality is a fundamental but elusive concept in corporate reporting (financial, sustainability, and integrated). It must be based on a determination of significant audiences and time frames. Determining materiality is a duty of the board of directors. The annual board “Statement of Significant Audiences and Materiality” is: How the board identifies significant audiences and time frames How the board defines the role of that corporation in society The foundation for the company’s integrated report Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Executive Summary Initial findings from the Statement Campaign show, so far, that: In all countries, contrary to prevailing opinion, the board does not have a fiduciary duty to put shareholders’ interests above all others’. The board’s fiduciary duty is, in all countries, first to the corporation as a separate legal entity with its own identity. In some countries, this duty to put the interest of corporation itself first is co-equal to with board’s separate duty to shareholders. In all countries, boards are also allowed, and in some cases required, to consider their duty to stakeholders. Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Why is “The Statement Campaign” Needed? As we presented the Statement of Significant Audiences and Materiality in forums around the world, some early reactions: Good idea But corporate lawyers will never let this happen Because of the myth of the primacy of board’s duty to shareholders So, we decided to enlist the American Bar Association’s “Task Force on Sustainable Development,” the UN Global Compact, and law firms all around the world to help us remove this barrier to enlightened value creation and to more accurately reflect the role of the corporation in society. Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL The Elements of the Statement Campaign Legal memos on the fiduciary duty of the board of directors and related topics, supplied on a pro bono basis from law firms all over the world Commitments for all G20 countries And a number of significant others Curated on the website of the American Bar Association’s “Task Force on Sustainable Development” and freely available Also on the website of the UN Global Compact Pilot companies to publish a “Statement of Significant Audiences and Materiality” (first company to do so is Aegon) PRI Engagement Initiative Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Goal of the Statement Campaign By 2025, the board of directors of every listed company in the world will issue an annual “Statement of Significant Audiences and Materiality” (The Statement) Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Origin of the “The Statement” Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL The Essential Nature of Materiality Can be quantitative or qualitative financial and (ESG) nonfinancial information It is entity specific It is audience dependent Binary—it is either reported or it is not Determining what information is material depends upon significant audiences and times for decision making These audiences and time frames should be determined by the board of directors Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Evidence of Investor Interest in Materiality According to a 2014 EY study “Tomorrows’ investment rules: a global survey,” institutional investors want a clearer view of what is material and want it directly from the company:Tomorrows’ investment rules: a global survey Materiality is a key concept that emerged from this survey. Investors were more likely to value information which came directly from the company itself rather than from third-party sources. In addition, among those that never consider ESG information in their decision- making process, the main reason for rejecting it was that they felt it was not material. Companies often complain that investors are not interested in their environmental, social, and governance (ESG) performance. If companies want credit for their ESG performance, they are responsible for clearly identifying which issues they consider to be material. Materiality determination begins with an annual board of directors “Statement of Significant Audiences and Materiality” Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Significant Audiences Limited in number since companies have to make choices in their resource allocation decisions High levels of engagement are required with all significant audiences Audiences excluded from the Statement show the board’s capacity to exercise judgment on audiences most important and most relevant to the firm Having the discipline to exclude audiences and issues makes the firm credible and enhances its dialogue with society Companies have an obligation to engage with other important audiences as well since their social license to operate comes from civil society Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Some High Level Interim Findings In every country, the law is that the board’s duty is first to the corporation as a separate legal entity, distinct and separate from shareholders In some countries there is primacy dualism regarding shareholders Laws on fiduciary duty vary in terms of the degree to which the board may, or must, consider non-shareholder stakeholders’ interests But in no country are directors forbidden to do so Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Some High Level Interim Findings It appears that countries align in the following four groups regarding directors’ fiduciary duty to stakeholders: “Specifically required,” such as in Brazil, where this duty to stakeholders is a deep and specific governance requirement. “Expressly allowed,” such as in the UK and China, where duties to society and specific stakeholders should be considered “Interpretively allowed,” such as in the USA, where the business “judgement rule” gives boards wide latitude to consider stakeholder impacts “Passively allowed”, such as in Columbia, where boards considering stakeholder audiences is neither prohibited nor discussed in law. Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Some High Level Interim Findings Much more in depth analysis needs to be done: Based on the legal memos that have already been submitted. For example, in the United States, a “primacy dualism” jurisdiction, the legal memo cites duty to shareholders, under the “business judgement rule”, as the source of permission for directors to consider broader stakeholder impact. More research is needed into other sources stemming from the co-equal duty to the corporation as a separate entity. Further research into specific issues across and between countries, given transnational corporate governance duties and reporting e.g.: Common vs. civil law jurisdictions Duty to bondholders, thus ESG materiality in credit Cohort groupings … and many more issues. Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Fiduciary Duty in the 21st Century Report The Statement Campaign is about the fiduciary duty of company boards of directors The Fiduciary Duty in the 21 st Century report is a project on the investor side regarding ESG integration (PRI, UNEP FI, UN Global Compact, UNEP Inquiry) These two initiatives reinforce and complement each other The Statement Campaign supports ESG integration on the company side The Fiduciary Duty initiative supports ESG integration on the investor side Companies can demand ESG integration by investors Investors can demand ESG integration by companies Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Fiduciary Duty in the 21st Century Report Legal review in each of the eight countries (US, Canada, Brazil, UK, Germany, South Africa, Japan and Australia) Data analysis and synthesis Global recommendations for Institutional investors Intermediaries, including stock exchanges, brokers, credit rating agencies, investment advisers, legal advisers and data providers Policy makers Next Steps The project team will host a launch event in each of the 8 countries Working groups will be set up to implement the country recommendations Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL Key Findings: Report to be Published at PRI in Person Conference in London on September 8-10 The purpose of this report is to end the debate about whether fiduciary duty is a barrier to investors integrating environmental, social and governance issues into their investment processes. A failure to consider long-term investment value drivers, which include environmental, social and governance issues, is a failure of fiduciary duty. Despite significant progress, many investors have yet to fully integrate ESG issues into investment decision-making processes. This report proposes global and national recommendations to support the move towards a sustainable financial and economic system. Copyright 2015 © Professor Robert Eccles and Tim Youmans
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HARVARD | BUSINESS | SCHOOL CDSB: Fiduciary Duty & Climate Change Disclosure Effort The Climate Disclosure Standards Board is leading an effort to improve the allocative efficiency of our financial system: Climate change should be a matter of fiduciary duty (via materiality determination) Markets do not yet take sufficient account of climate change Standards: comprehensive and comparable information for corporate reporting Copyright 2015 © Professor Robert Eccles and Tim Youmans Purpose “Signatories commit to produce and make use of climate change information on a common basis through the Climate Change Reporting Framework or other comparable framework” www.cdsb.net/fiduciary
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HARVARD | BUSINESS | SCHOOL Next Steps Collaborate with the Fiduciary Duty in the 21st Century initiative Continue to gather legal memos on fiduciary duty Completion date of 11/30/15 for those already promised Identify law firms in all missing countries where the concept is relevant Recruit companies for The Statement pilot program Find PRI signatories that will sponsor this initiative based on research showing how “ESG integration” can improve investor performance Write a paper showing the relevance of “The Statement” to the UN’s Sustainable Development Goals Future research Open to collaborations (law firms, academics, etc.) But want to encourage independent initiatives Set up the www.thestatementcampaign.org website Turn this into a real grass-roots campaign Copyright 2015 © Professor Robert Eccles and Tim Youmans
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