Materiality Is a Choice, Not a Calculation

A disclosure committee meets the morning before a results announcement. The CFO, the General Counsel, the Corporate Secretary, the IRO, and one independent director sit around a table with three items on the agenda.

A major customer has shifted procurement away from one of the company’s product lines, reducing revenue exposure in that segment by roughly fifteen percent over the next twelve months. A capital project planned for this quarter has been deferred by eight months for reasons that combine permitting delays with supply-chain considerations. Margins in one of the four business segments have compressed by 240 basis points over the trailing four quarters, against three quarters of nominal stability in the consolidated figure.

The General Counsel works through each item. Is the customer-shift information material? Probably not. The revenue exposure represents under three percent of consolidated revenue and falls below the company’s stated materiality threshold. Is the capex deferral material? Probably not. The deferral does not change the annual capex envelope, the project remains in scope, and the eight-month slip falls within ranges historically not disclosed. Is the segment-margin compression material? Probably not. Segment-level financial information is not separately required at this disclosure threshold, the consolidated number remains within guidance, and the segment reporting in the annual report will capture the trend in due course.

The committee agrees on all three. None of the items is material. None gets disclosed. The release goes out at the legally required level. The committee has done its job correctly, by the operative definition of what its job is.

Six months later, a long-only PM in London who has been holding the stock since 2022 emails the IRO. “I don’t quite understand what is happening in this company. The numbers look fine. Something is happening I cannot see. Help me figure out what I’m missing.” The IRO does not have an easy answer, because the things the PM cannot see are precisely the three items the disclosure committee decided were not material six months earlier. The committee was right by the legal threshold. The committee was wrong by what the PM actually needed to know to hold the position with conviction.

This is the closing essay in a series mapping places where the IR practitioner consensus diverges from the cross-disciplinary literature. The previous four essays covered targeting, guidance, the IR function’s objective, and the marketing vocabulary that has been shaping practice invisibly. This one covers the technical question underneath the other four: what the disclosure committee decides is material, and what the cross-disciplinary literature has been arguing for forty years about how that question should be framed.

The reason this essay sits at the end is structural. The disclosure-committee meeting is where the other framings get expressed in concrete decisions. Who you target depends on what gets disclosed. The guidance posture depends on the same disclosure stream. The IR function’s objective gets acted on at the disclosure committee, not at the press release. The marketing-versus-information-transfer framing manifests in the moment the committee decides what gets said and what does not. If the materiality framing shifts, everything downstream shifts with it.

The practitioner framing

The IR practitioner tradition treats materiality as fundamentally a legal question. The framing is partly defensive (disclosure that exceeds the legal threshold without specific justification carries risk; disclosure that falls below it carries a different kind of risk), and partly inherited from the audit and corporate-law disciplines adjacent to the IR function. William Mahoney’s Professional’s Guide captures the practitioner experience honestly: “materiality defies simple declaration—leaving IR practitioners stepping through a quagmire of evolving legal standards and case-by-case judgment.” That is accurate to how the function operates. It is also, in its operational implications, incomplete.

The Bragg disclosure-committee architecture is designed around the legal threshold. The committee considers an item, evaluates it against the materiality test the company has adopted (typically a percentage-of-revenue or percentage-of-earnings threshold combined with a “reasonable investor” judgment), and decides for or against disclosure. The architecture works. It produces consistent, defensible decisions. It also produces decisions calibrated to the legal threshold rather than to the information needs of the company’s actual investor audience.

The trade-association bodies of knowledge treat materiality the same way: a regulatory category to be managed against the local standard — the SEC’s “reasonable investor” test and Reg FD’s selective-disclosure constraints in the US, the UK and EU frameworks elsewhere. Practitioner guidance from Indonesian, Singaporean, Hong Kong, and Malaysian regulators frames materiality through their own jurisdictional thresholds. In every case the consensus is the same: materiality is determined by reference to a legal standard, and the IR function’s job is to apply the standard accurately and to make defensible disclosure decisions.

This is the framing the disclosure committee at the start of this essay was operating under. By that framing, the committee got every decision right.

The investor-information question

Robert Eccles’s ValueReporting Revolution (2001) and his subsequent work with Samuel DiPiazza in Building Public Trust (2002) frame materiality through a different question. What do investors and analysts actually need to know to make accurate decisions? The framing is empirical rather than legal. The relevant standard is not the regulatory threshold; it is the gap between what investors want and what companies provide.

Eccles documents the gap directly. Surveying investors and analysts in the high-tech sector, Eccles measured what he calls the Information Gap: the difference between the importance investors attach to a measure and how satisfied they are that their information needs on that measure are being met. The results are striking. Investors perceived Information Gaps on 14 of 15 measures they considered highly important. They expressed satisfaction with adequate information on only one of sixteen measures they ranked highly important. The phrase Eccles uses: “this is not a gap, it’s the Grand Canyon.”

Even the most basic financial measures showed large gaps. Earnings and cash flow, the disclosures most consistently regulated and most uniformly required, produced Information Gaps for investors, because the format of disclosure (timing, level of segment detail, level of operational explanation) did not meet what investors needed even when the disclosures themselves were technically compliant. The conclusion Eccles draws is that the disclosure regime as practised is producing meeting-the-threshold compliance and failing-to-meet-investor-needs reality at the same time. The two are not in tension. They run in parallel.

Building Public Trust extends the analysis. The corporate reporting supply chain (companies producing disclosure, auditors validating it, regulators enforcing it, intermediaries distributing it, investors consuming it) has structural inefficiencies that produce trust deficits at every link. The materiality decision is one of the most consequential points in the chain, because it determines what enters the disclosure stream in the first place. A materiality regime calibrated to legal compliance produces a disclosure stream that is well-formed by legal standards and impoverished by investor-information standards.

The IR practitioner tradition has not engaged this critique seriously. Eccles is widely cited in the academic literature and widely ignored in the practitioner literature. The disclosure committees making the decisions this essay opened with have, in most cases, never been briefed on the Eccles framework.

What valuation discipline needs that legal materiality doesn’t require

Aswath Damodaran’s Narrative and Numbers engages materiality through the valuation lens. Valuation models depend on inputs that are systematically below most companies’ legal materiality thresholds: segment-level operational metrics, customer-concentration shifts, capital-allocation specifics, working-capital dynamics by business unit, capacity utilisation trajectories, R&D-project status, regulatory shifts that have not yet translated into revenue impact. None of these is reliably material under standard legal frameworks. All of them are material to valuation models that try to estimate intrinsic value accurately.

The mechanism is precise. Valuation models translate operational reality into financial projections, which translate into intrinsic-value estimates. The translation requires information about the operational layer that legal materiality thresholds do not require companies to disclose. A company that discloses only at the threshold produces information that legal compliance is satisfied with and valuation models cannot fully use. The valuation analyst constructs the operational layer through inference: peer benchmarking, industry data, channel checks, conversations with management. The inferences are noisier than the disclosures would have been. The intrinsic-value estimates are correspondingly noisier. The pricing of the stock reflects the noise. Any IRO who has fielded an analyst’s fourth follow-up email about segment-level capex has watched this inference machinery running from the other side.

This is, in Damodaran’s framing, the operational consequence of legal-threshold materiality. The information that would produce accurate valuation is not the information legal materiality requires. The gap between the two is the space in which valuation noise lives. Companies operating at the legal threshold are systematically choosing the noisier-valuation outcome over the more-accurate-disclosure outcome, often without recognising that the choice is being made.

The double-materiality complication

The European regulatory framework, particularly the Corporate Sustainability Reporting Directive (CSRD), has been moving toward a different materiality framework that the IR-practitioner tradition is only just beginning to engage with seriously. The framework is called double materiality. The ICIR Study Guide describes it: companies should consider both the impact of sustainability matters on the organisation (financial materiality, the traditional framing) and the impact of the organisation on sustainability matters (impact materiality, the new addition).

The double-materiality framework is, on its face, a sustainability-disclosure development. More broadly, it is an explicit acknowledgement that materiality has multiple legitimate framings and that legal-threshold materiality is one of them rather than the only one. The European regulatory move, regardless of how comfortable it is for non-European companies, normalises the idea that what counts as material depends on the question being asked. Materiality-to-investors-evaluating-financial-impact is one question. Materiality-to-society-evaluating-corporate-impact is another. Materiality-to-investors-evaluating-long-cycle-business-trajectory is a third. The cross-disciplinary literature has been arguing that the third question matters as much as the first, and that the IR-practitioner tradition has been conflating the first and the third in ways that hide the third from view. Little of this has reached the agenda of the committee in the opening scene, but the question it legitimises — material to whom, for what decision? — is exactly the one that committee never asked.

Asian regulatory frameworks have not moved to double materiality. OJK, IDX, MAS, HKEx, and SEBI all operate primarily within single-materiality regimes anchored to financial impact on the company. The cross-disciplinary critique is not, strictly speaking, a regulatory critique. It is an operational one. Companies operating in single-materiality jurisdictions are not legally required to engage the broader framings. They are also not prevented from engaging them voluntarily. Whether to engage or not is a choice the IR function and the disclosure committee are making, often without recognising it as a choice.

The Yorozu angle, again

The institutional pattern Yorozu documents in Japanese listed-company practice — the honne-tatemae gap between operational reality and disclosed narrative, which Why Compliant Companies Are Often Functionally Opaque explored earlier — is, structurally, a materiality story. The legal materiality threshold determines what enters the disclosure stream. The operational reality continues to exist whether disclosed or not. The gap between the two accumulates across quarters until something forces it to close.

Yorozu’s case work follows Japanese companies that maintained wide honne-tatemae gaps over multiple years to their characteristic endings: narrative collapse, leadership exits, restructurings that arrive in public. The cases are consistent enough to take seriously as a mechanism rather than a coincidence. The framing is regional and culturally specific in its presentation, but the structural mechanism is general. Companies operating disclosure at the legal-threshold materiality level produce honne-tatemae gaps as a matter of course. The gaps are sometimes small and sometimes large, depending on how much operational reality the legal threshold misses. Across many quarters, they compound. Eventually some operational reality forces its way into disclosure (a writedown, a regulatory action, a customer loss, a strategic reversal) and the cumulative gap closes at once. The share-price reaction reflects the gap that had been hidden in the disclosure stream, not the operational reality of the current quarter alone.

This is the regional manifestation of the cross-disciplinary critique. The companies maintaining wide materiality gaps are operating compliantly and accumulating reputation costs that never appear on any internal report. The cost shows up when the gap closes. The cost was paid quarterly during the years the gap was widening.

What the operational alternative looks like

The cross-disciplinary literature, taken together, suggests a different framing for the materiality decision. What would the company’s existing concentrated long-duration shareholders want to know if they were running this business?

The framing is deliberate in its construction. It does not ask what the regulator requires; that question is settled separately and continues to be settled by the legal threshold. It does not ask what the broad institutional universe would respond to; that question imports the marketing-and-sentiment framing the previous essay in this series argued against. It asks what the audience the company wants would need to know if their information access were the only constraint on their decisions. The framing is calibrated to the targeting decision the Divergence series opened with: cultivate concentrated long-duration holders, then disclose at the level those holders need to maintain conviction in the position.

In the disclosure-committee scenario at the start of this essay, the alternative framing changes the answer to each item.

1. The customer-shift information at three percent of consolidated revenue is not material under the legal threshold. It is potentially material to the question a concentrated long-duration holder would ask: what is happening in this segment, and is the trend continuing? The disclosure decision, under the alternative framing, depends not on the percentage of consolidated revenue but on whether the shift is symptomatic of a larger pattern the holder needs to see. Sometimes it is; sometimes it isn’t; the committee makes a different decision than the legal-threshold framing would have produced.
2. The capex deferral is not material under the legal threshold. It is potentially material to a holder trying to understand the company’s capital-allocation discipline and its capacity to execute on its strategic plan. The decision to defer reveals something about the operational environment, the planning function, the relationship between strategy and execution. Disclosure of the deferral, with the reasoning, would inform the holder. Non-disclosure leaves the holder to construct an inference from the absence. The legal threshold is silent on which is better. The investor-information framing is not.
3. The segment-margin compression is not material under the legal threshold. It is potentially material to a holder trying to understand whether the business mix is shifting in ways that will eventually affect consolidated performance. Segment-margin trends are leading indicators of consolidated-margin trends. Disclosure now would give the holder the information they need to maintain or adjust the position with full understanding. Disclosure later, at the point where consolidated margins follow segment margins down, would inform the holder less, and would inform less-engaged audiences who would react to the consolidated number without the operational context.

In all three cases, the legal-threshold framing produces non-disclosure. The investor-information framing asks a different question: what does this audience need to know to understand the company accurately? The answer is sometimes the same as the legal-threshold answer. Often it is different. A disclosure committee running under the alternative framing makes different decisions than one running under the legal-threshold framing.

The Catch-22 the practitioner tradition has been carrying

The disclosure committee has a legitimate concern about the alternative framing. It requires judgement that the legal-threshold framing does not. The legal threshold is, for all its acknowledged complexity, a calculable standard. The investor-information framing requires the committee to imagine what concentrated long-duration holders would want to know, which requires a model of who those holders are, what they care about, and how they update their views on company performance. The disclosure committee is being asked to do investor analysis as part of its disclosure work.

The market-reaction lagging-indicator problem makes this harder. Mahoney and Bragg both acknowledge in the practitioner literature that market reaction after disclosure is, in part, the test for whether the information was material. The test runs backwards. The disclosure committee decides prospectively; the market reaction validates or invalidates the decision retrospectively. The lagging indicator cannot be consulted before the decision. The committee is, in effect, making a judgement and finding out later whether the judgement was right.

The committee was right by the legal threshold. The committee was wrong by what the PM actually needed to know.

This is the Catch-22 the practitioner tradition has been carrying for as long as materiality has been a contested concept. The legal-threshold framing is appealing because it removes the judgement. The threshold is the threshold, the calculation produces a clean answer, the decision is defensible regardless of what the market does later. The investor-information framing reintroduces the judgement, the lagging-indicator problem, and the discomfort of decisions that depend on the committee’s model of its own investor base. The discomfort is real. It is also the price of operating disclosure at the level the cross-disciplinary literature documents as informationally adequate.

On having sat on those committees

I have been on disclosure committees where materiality decisions were made on legal-threshold grounds. The decisions were correct as compliance decisions. They cleared the relevant regulatory tests. They produced disclosure streams that no regulator would have flagged as inadequate. They also produced, across multiple quarters, exactly the information asymmetry that Eccles documents and Yorozu’s empirical work describes. The long-only PMs in our client base were, on average, less satisfied with the information they were receiving than the committee believed they were. The IROs sometimes heard about this. The disclosure committees almost never did. The framework that would have made the gap visible was in Eccles and DiPiazza’s work I had not read carefully enough to bring into the committee meetings.

The error this essay is naming, specifically, is that I treated materiality as a question with a calculable answer when the cross-disciplinary literature has been pointing out for forty years that it is a question with a chosen answer. The legal threshold provided a calculable answer. The calculable answer was a real answer to a real question. But it was not the only real question, and the practitioner tradition I was operating within treated it as if it were. The information-asymmetry consequences accumulated quietly. The disclosure committees never saw them, because the cost was paid elsewhere.

The four previous Divergence essays made similar confessions about different aspects of IR practice. Targeting, guidance, the IR function’s objective, the marketing vocabulary that organises the profession; each is a place where I have been part of advising work that was operating within the practitioner consensus and producing consequences the cross-disciplinary literature predicted. Materiality is the fifth, and possibly the most consequential, because the disclosure committee is the operational interface where most of the other framings get expressed in concrete decisions. A disclosure committee operating under the investor-information framing produces different decisions about targeting (it reveals more to concentrated long-duration holders), about guidance (it discloses operational metrics that make point-estimate guidance less necessary), about the IR function’s objective (it operates as information transfer rather than stock-price management), and about the marketing vocabulary (it stops being marketing because there is no audience to market to that is not already inside the disclosed information). The materiality framing is the structural layer that, when changed, propagates into all the others.

The Asian context

Most Asian regulatory frameworks have narrow materiality thresholds, narrower in some cases than the US Reg FD framework. The narrowness is not, in itself, a problem. It is the legal floor against which compliance is measured. The problem is that most Asian listed companies operate disclosure right at the floor, with disclosure committees calibrated to the legal threshold and no operational mechanism for engaging the investor-information question.

Foreign institutional investors, particularly long-only funds based in Singapore, Hong Kong, London, and New York, read the gap. The Yorozu pattern at the institutional level is not Japan-specific. It is regional. Companies producing only legal-threshold disclosure are systematically under-engaging the foreign-institutional audience that, in most regional markets, represents the marginal buyer for any meaningful pricing improvement. The discount foreign investors apply to Asian listed companies for opacity is, in significant part, the discount they apply for legal-threshold-only disclosure. The discount is invisible to internal review because the foreign investors who declined to add positions do not send emails explaining why.

A regional listed company that adopted the investor-information framing for materiality, running disclosure committees calibrated to what concentrated long-duration holders need rather than to the legal threshold, would produce disclosure streams that look different from peers’. Not all the disclosures would clear at the regulator (some would; some would not need to). All of them would clear at the level foreign institutional investors are reading them. The discount the company carries today against its substance would, over multiple quarters, compress. The pricing would reflect what the company actually is rather than what the legal-threshold disclosure has been allowing the market to see.

This is, again, the asymmetry that has run through every essay in the series. Most regional listed companies will not change their materiality framing, because the legal threshold is calculable, defensible, and produces decisions the disclosure committee is comfortable with. The small number that engage the alternative framing will produce different disclosure, attract different shareholder bases, and compound different pricing trajectories over the years it takes disclosure discipline to become something peers cannot quickly copy.

The series, and the body of work, briefly

This is the fifth and final essay in the Divergence series. The five essays have engaged different layers of IR practice: who you target (The Investor Base You Have Is the One You Chose), what you tell them (Conservative Guidance Is a Habit, Not a Discipline), what the function is for (Stock Price Is the Outcome, Not the Objective), what we call the function (IR Is Not Really Marketing (And the Difference Matters)), and what counts as material in the first place. Each named a place where the IR-practitioner consensus diverges from the broader literature, and what the divergence costs the companies operating on the consensus side.

It is also the closing piece of a longer body of work. The Bedrock series laid the foundation: The Bedrock of Investor Communication set out seven principles every IR programme is either practising or paying for, and its companions worked through the anti-pattern of intellectually blank assertions, the elevator-pitch formula, and the relationship between PR and IR. The Divergence series, the five essays that followed, then took specific places where practitioner consensus and the broader literature have been pointing in different directions, and tried to name what each side gets right and where the dispute sits.

A few things are true at the end of all of this that were not stated in any single essay.

The IR-practitioner tradition is not wrong about everything. The operational technique that runs through these essays (audience clarity, disclosure discipline, message coherence, crisis-response protocol) is genuinely useful and largely uncontested. The cross-disciplinary literature is not right about everything either. Some of its prescriptions, including Buffett’s no-guidance posture, Stout’s wholesale rejection of shareholder-value maximisation, and Eccles’s full-information-transfer ideal, are difficult to put into practice in most listed-company contexts. The interesting question is not which side is right but where the disputes are real and what the operational consequences of taking either side look like. The five divergences described in the series are the places where the disputes are real and the consequences are large enough to matter.

The companies and IR functions that engage the disputes will operate differently from peers. The disclosures will look different. The shareholder bases will look different. The pricing trajectories will look different over the kind of horizon (three to five years, sometimes longer) that turns communication discipline into a moat. The literature has been pointing at the disputes for years. The practitioner tradition has mostly assumed them away. The opening this creates for the small number of companies and advisors willing to read both sides carefully and choose deliberately is meaningful, in Asian markets specifically, where the convention is uniformly the practitioner tradition’s and the differentiation available to anyone who chooses otherwise is correspondingly sharp.

I run an IR consultancy. I have spent years inside the practitioner tradition. I have made the choices the tradition prescribed. The choices were defensible by the tradition’s standards. They were also, in retrospect, choices made on framings the tradition had not examined carefully enough. The twelve essays in this body of work are an attempt to put the examinations on the page, so that anyone reading them (practitioner, CFO, CEO, board member, fellow advisor) can consider the alternatives without having to assemble the cross-disciplinary literature themselves.

None of the twelve essays prescribes what any particular company should do. The framings are now visible. The choices remain open. That is, in the end, the most honest place to leave the reader.