The stated goal of integrated reporting is to explain “how a company creates value over time.”
To date, a lot of the focus in practice (and theory) has been on identifying the key capitals that drive this value creation. But the question about how value and the capitals change over time, and how the capitals interact with each other has been too advanced for most practitioners.
I’ve been lucky to witness the development of a platform that endeavors to help business people map and model value creation in a dynamic way. It’s called VDMBee.
A few months ago, they approached me about including the open license Value Creation Worksheet tool that I developed into their platform. It’s there now along with a number of other tools such as Alex Osterwalder’s Business Model Canvas. I can’t wait to dig in and test it out and hope to find a good test case (contact me if you’re interested).
A little bit of background: The connection between my intangible capital work and VDMBee goes back to shared ideas and work with Verna Allee. I can actually remember the airplane trip when I opened Verna’s 2002 book The Future of Knowledge. In it, Verna laid out powerful ideas about flows of value in networks. Her work and that of many others led to the formation of the Value Delivery Modelling Language™ (VDML™) managed by Object Management Group® (OMG®), an international, open membership, not-for-profit technology standards consortium. As explained in the standard:
VDML is designed to address several critical business challenges: 1) It creates a robust way to model both tangible and intangible value flows; 2) It provides the capacity to model complex collaborations and business networks; 3) It provides a flexible way to model business activities to more readily support continuous transformation in environments of high variability; and 4) It supports more effective shared capabilities optimization and deployment. Table 1.1 highlights these challenges and VDML solutions
The VDMBee platform is the first software implementation using VDML. It’s a forward-looking tool to model how value gets created. But once in use, I can see how it will inform measurement of success against a plan.
Here’s how the integrated reporting community could use the platform:
- Identify the core capitals of the company (using the Value Creation Worksheet)
- Model how the capitals combine to create value over time
- Measure the value flows
- Create different cases to test how changes in one part of the system might affect others
- Compare projected versus actual performance
I’ve used earlier versions of the Value Network approach. It is an extremely robust way of modelling value. I think that we will all learn a lot from using tools like this.
Today 100% of U.S. public companies provide accounting information publicly. It’s a requirement and an accepted practice. At the same time, over 80% of those companies are also disclosing some kind of sustainability data. This latter kind of disclosure is not yet a requirement in the U.S. and standards are still in development. But as the data show, the practice is already well underway.
These two kinds of presentations have traditionally been made in different reports offered on different sections of their websites with differing messages.
Now, however, the financial markets are awakening to the importance of Environmental, Social and Governance (ESG) issues as a source of risk and a driver of innovation and value. They are looking to connect the dots between these different messages. This creates a dilemma for companies. They have a business rationale for both their financial and their sustainability reporting. But they are not accustomed to telling a unified value creation story.
The International Integrated Reporting Council (IIRC) is leading the charge in creating a model that unites these differing perspectives (read an introduction here). Its Framework provides a way forward to creating holistic presentations that explain the multiple forms of capital that support a company’s value creation ecosystem. The IIRC model draws on the traditional accounting/financial reporting perspective, the sustainability/ESG movement and a third, less understood field of study, broadly referred to as intellectual or intangible capital (IC).
The IC field has been focusing for several decades on the rise of the knowledge economy. While IC practice is not as advanced as accounting and sustainability reporting, there is already significant research that suggests the size and importance of this class of capital to the success of companies in today’s economy.
Combining all three perspectives is powerful but challenging. Few people are trained in all three of the root disciplines. So we have to work together and learn from each other. But it's the right goal to support the kind of integrated thinking that empowers financially-sound decisions today that still preserve and build value for the future.
I have just published a paper with my co-author Elena Shakina about the changing role of IC during the economic crisis.
This study has been carried out in our International Laboratory 'Intagible-driven Economy' (ID Lab).
The paper investigates factors of corporate success over the crisis period of 2008–2009. We advocate the idea that investments in intangibles allow a company to be better off, even if the markets go down. We have analysed a sample of more than 300 companies which operate in developed and emerging European markets, and belong to traditional and innovative industries. The result is that there is a robust significant link between the companies’ investment decisions and their performance before and during the crisis. This study provides empirical evidence that investment restriction is not the best response to an economic recession.
If you are interested you can download the paper at http://www.tandfonline.com/doi/full/10.1080/1331677X.2014.974918#tabModule. It is open to everybody.
I hope that the study result of interest and we would appreciate any comment.
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