We routinely hear board directors, CEOs, and CFOs of publicly-listed corporations refer to shareholders as owners of the corporation. Under this thinking, it is natural to conclude that the board’s duty is to its shareholders. Contrary to this popular belief, however, a board’s real duty is to the interests of the corporation itself.

As one of us responded in a recent interview with John Authers of the Financial Times, “The shareholders don’t actually own the corporation. They own shares in the corporation. The corporation owns itself.”

Clarifying this common misunderstanding about the ownership of modern corporations is a central point of our new paper, Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality. Aiming to improve corporations’ public disclosures, we argue that the board should publish an annual statement in which it identifies the significant audiences for the corporation’s vitality and long-term success. This clearly includes shareholders, but it could include other stakeholders, such as employees. This is simply about transparency in the purpose the board sees for the corporation.

Citing the work of Adolf A. Berle and Gardiner Means, whose 1932 book The Modern Corporation and Private Property has been lauded as the most important business book of all time, our paper unveils new research on the legal framework underpinning fiduciary duty around the world. In the two dozen countries analyzed so far, the principles of limited liability, separate corporate personhood, and the primacy of directors’ duty to the corporation are universal.

From Russia to China to Brazil to India to the United Kingdom, the notion of directors’ duty to shareholders is always separate from, and never superior to, directors’ duty to the corporation as a separate legal “person.” Even in the United States, a director’s duty to shareholders is at best co-equal with, but not above, the duty to the potentially immortal corporate person.

Shareholders own a tradable set of rights: to vote, to claim residual assets, and to receive the wages of capital. These rights are free from the burdens of ownership. Shareholders thus become temporary, while the corporation is permanent—controlled not by shareholders, but by the board of directors.

Under a legal doctrine known as the business judgment rule, directors can take into account the interests of other stakeholders if they are in the best interest of the corporation. In our paper, we aim to broaden the understanding of directors’ fiduciary duty and to provide directors with a new concept to narrow and focus their judgment, by asking first “Material to whom?” in their responsibility to define materiality for reporting and strategy. We call this the Statement of Significant Audiences and Materiality, or simply The Statement.

No matter how big the corporation, it has limited resources. Thus, the board has a responsibility to determine which audiences can help the corporation to create value over the short, medium, and long term. These audiences will be privileged for resource allocation purposes, and they will determine what the company deems to be material for reporting purposes. If the board decides, for example, that only short-term shareholders matter, then only short-term financial results are material. But if employees are also a significant audience, then human capital issues become material as well.

The Statement, a simple one-page annual declaration by the board, is values-neutral. The board can decide which, if any, environmental, social, and governance issues are material. All we are asking for is transparency about the board’s view of the role of its corporation in society.

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