corporate reporting (2)

Over the decade or so that I have been focused on intangible capital, there has been a parallel conversation going on about sustainability. These are two broad fields with many players and approaches but I’ll try to generalize the two (excuse the shorthand versions):

  • Intangible Capital – also known as IC, Intellectual Capital, Innovation Capital, Digital Capital – Focused on the changes in the core operating assets of organizations that have occurred as we move from an industrial to an IT-fueled, knowledge-based economy.
  • Sustainability – also known as ESG (Environmental, Social and Governance) and Triple Bottom Line (People, Profits, Planet) – Focused on the fact that the industrial approach of not considering the human, societal and environmental effects of corporate actions are endangering our collective future.

Both conversations are about the path to prosperity—measured in both financial and nonfinancial ways. But there hasn’t been too much attempt to unite the two views. One notable exception is the IIRC (International Integrated Reporting Council). 

I admit that I resisted the IIRC approach for a long time. For one thing, we at Smarter Companies have been more focused on innovation and value creation than on corporate reporting, which appears to be the IIRC’s primary focus. And I feared that combined the two made it harder to tell the stories of each of these different fields of study—mixing apples and oranges. It’s kind of ironic because I have often talked about the new design constraints for modern businesses (many of which were related to environmental and social concerns), but I wasn’t able to make that connection. But I’ve increasingly seen the need to find a way to talk about the connection between our mission and that of my colleagues interested in sustainability, especially because IC is about the gift of new knowledge resources that we humans have been given at the moment we need them most. IT and IC hold the key to greater sustainability.

In December, the IIRC released their latest framework document. The framework is written in a purposely vague way as the intention is to start a conversation rather than legislate a solution (an approach I agree with). What spoke to me most in the report was this diagram explaining how organizations create value using what they call the “Six Capitals” (with my overlay of the IC knowledge factory):

10468397453?profile=originalI think this graphic does provide a framework for integrated thinking about corporate value creation that includes both IC and sustainability thinking. And it’s given me a way to talk with colleagues about the intersection between our respective work.

At Smarter Companies, we focus on three of the six capitals: Human, Relationship and Intellectual (which we call Structural Capital—read here to see why we avoid the word intellectual). We use an additional category we call Strategic Capital that actually corresponds really well to their central box with business model, external environment and culture. These four categories make up what we call the “Knowledge Factory” in the book Intangible Capital.

The Knowledge Factory is how organizations use Manufactured Capital and generate Financial Capital. It’s also how organizations build or destroy Natural Capital. So all of the capitals are important and contribute an integrated whole. So I say good for the IIRC for trying to get us all to think holistically. Maybe this is a base we can all build upon.

What do you think? Is there a convergence here that will help us advance both fields?

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Why the rules for corporate reporting should change in an era of abundance

10468391893?profile=originalWe are so used to the current conventions of accounting and corporate reporting that we never think to question them. But if you think about it, these conventions are based on the “I win, you lose” thinking of the industrial era. This is because that era (and all those that preceded it) were dominated by tangible assets which are subject to the laws of scarcity—that is, tangibles are finite assets, if I sell you something I have less to sell. It’s a zero-sum game.

Today’s economy is dominated by intangible assets which are not subject to the laws of scarcity. If I sell you a product/service dominated by intangibles, the value of my intangibles doesn’t go down. Rather my intangibles probably increase because I’ll learn from your use and be able to improve my knowledge.

What does this have to do with reporting? Well, in an era of scarcity, I’m motivated to maximize profit for each thing I sell. Showing you how much I’m making off you doesn’t help me maximize. So I probably am not going to share details with you. If I take public investors, I will have to report my financials but I’ll do it in a way that summarizes the overall profits/losses.

In an era of abundance, I still want to make a profit. But the way I do it is by creating value for my customers and stakeholders. The focus is on them. In this case, showing how I am doing (that is, how well I create value for my stakeholders) contributes to your confidence in me. It leads to more sales (and, if you're doing it right, more profits). But it's about you. So I want to share details with you. To help you see my strengths. To help both of us see my weaknesses (and understand the path to fixing them). It’s no longer about how I’m benefiting but, rather, how we mutually benefit from our relationship.

So bottom line, who should have access to your ICounting information? Everyone that you do business with. All your stakeholders. Customers. Users. Partners. Employees. Communities. And, yes, Financial partners.

Learn how to build and implement ICounting in your or your clients’ organizations through our ICountant Training Program.

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