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10468399076?profile=originalThe 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:

  1. Identify the core capitals of the company (using the Value Creation Worksheet)
  2. Model how the capitals combine to create value over time
  3. Measure the value flows
  4. Create different cases to test how changes in one part of the system might affect others
  5. 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. 


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The Drive for Integration


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.


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I have been challenging myself to find ways to bring the richness of the intellectual/intangible capital field to the integrated thinking and reporting movement. 

The three papers shared here are the product of that thinking. We're on a journey together. I hope to hear your feedback and ideas on we all go from here.  

Part 1 reviews the data on the role of intangibles in corporate investments and valuation. Then it examines intangibles in the context of the multi-capital model from the IIRC. It ends up suggesting that all the capitals can and should be examined from three perspectives: accounting, internalities and externalities.  Read it now   

Part 2 builds on the data 10468398262?profile=originaland frameworks in Part 1, providing a four-step process to creating, managing and communicating using a multi-capital model. Examples are included from XPX, a network of business advisors, as well from as public company reporting. It ends with a review of the benefits beyond reporting of this kind of integrated approach. Read it now


This paper is i-capex _ intangible capital expenditurean excerpt from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization being re-released for readers from the integrated reporting movement. Read it now 
What do you think? I look forward to your comments!
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The role of Intangibles in Russian firms

Our paper "Bridging the gap in competitiveness of Russian companies with intangible bricks" is already available in Measuring Business Excellence.

In this paper, we analyse the difference of competitiveness between European and Russian companies considering the role of intangibles. We have found a significant difference in the means of competitiveness between European and Russian enterprises. Moreover, we have found a robust negative trend in the global competitiveness of Russian companies, despite a number of positive conjunctural shifts in favour of Russian local production – appreciation of the rouble, together with measures of protective governmental policy. We can assert that there is a gap in the competitiveness between Russian and European companies, and that this gap is more significant in the manufacturing, construction, services and financial sectors.

We hope that this study can help to understand better Russian firms and how they should reduce the gap in the endowment of intangibles.

We would appreciate all kind of comments.

The reference is:

Elena Shakina, Angel Barajas & Mariya Molodchik , (2017)," Bridging the gap in competitiveness of Russian companies with intangible bricks ", Measuring Business Excellence, Vol. 21 Iss 1 pp. - Permanent link to this document:

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Foreign trade driven by offshoring has caused a large loss in manufacturing jobs. A change in trade policy can return many manufacturing jobs to the USA and stop many additional losses.

The right legal argument recognizes that trade policy and economics don’t account for THE THEFT OF PUBLIC INTANGIBLE CAPITAL (PIC) IN OFFSHORING where the PIC was financed with public investments. Failed trade policy is based on a paradigm of comparative advantage but doesn’t penalize offshoring that is advantaged by the theft of PIC. Economics currently ignores the theft of PIC by a company that does offshoring where the PIC is a product of public investments such as those in national defense, federal R&D, domestic security, healthcare, public (and non-profit) education and infrastructure.

Trade policy currently protects the theft of many types of private IC such as patents but ignores the theft of public IC (PIC). The theft of PIC occurs when business operations at a company with jobs and factories are first established in America with PIC created as a result of public investments in IC that get translated into business IC and then moved offshore as proven business capabilities (both tangible and intangible capital) consisting of knowledge, tools, technology and processes. Since 1992, IC has been a larger part of business investments as a part of GDP in America than tangible capital.

Theft of PIC in offshoring creates a negative externality in economics that is similar to pollution (and theft) of public resources penalized in environmental regulation. Trade imbalances don’t measure the flows of IC. Measuring the flows of IC created with public investments is a prerequisite for properly governing offshoring in globalization. The new international activity in Integrated Reporting is changing financial reporting in business to measure both tangible capital and IC.

The 21st Century hopefully will finally see the huge gap in economics filled so capitalism, financial accounting and government policy measures IC and defines laws and compensation protecting applications of IC including private and public IC. The stagnation in wages is a symptom of the failure to compensate workers for the applications of their IC.

Trade Policy should add regulations on offshoring that require repayment of the apportioned public investments that produced the PIC used to build manufacturing operations at a company with a tax of at least 20% on the value of traded goods sent back to America from offshored factories. But there should be no broad tax on imports.

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 New paper about the strategy on intangibles. Changing to a more intangible-intensive strategy can have benefits but it has costs so it is important to understand whether there is a threshold for the change. This is analyzed in "Status-quo vs new strategy in intangibles" ( To get the conclusions there are some mathematical procedures that can appear as complicated but the conclusions are quite clear. Enjoy the reading and comments are welcome. 

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David Oberhettinger, Chief Knowledge Officer (CKO), NASA/Caltech Jet Propulsion Laboratory delivers a half day workshop where participants will learn:
• How key knowledge is worth retaining and reusing
• The Deliberate Approach vs the Emergent Approach to KM Strategic Planning
• KM practices, tools and methods in retaining knowledge
• An Agile KM emergent approach: an enterprise’s KM strategy is not completely planned and deliberated in advance
• How to adopt methods and tools unique to your organisation
• Building a Business Case for a new KM program
• What factors are important in institutionalising and sustaining the program against the time

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In this link:, you can find a comment on our paper on intangible-intensive profiles in JIC.

This is a comment in the journal Strategic Direction. 

(2016) "Measuring the unmeasurables: Comparing corporate performance through intangibles", Strategic Direction, Vol. 32 Iss: 3, pp.28 - 30.

I hope that you will decide to read our paper

Elena Shakina Angel Barajas , (2015) "Intangible-intensive profile of a company: the key to outperforming",Journal of Intellectual Capital, Vol. 16 Iss: 4, pp.721 - 741.


Thank you

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Decoding Larry Fink’s CEO Letter

Blackstone is the world’s largest investor. So it’s news when its CEO, Larry Fink, sends a letter to the CEO’s of the S&P 500. He sent one last year and just sent a new one this month that is printed in full at Business Insider in which he calls for longer-term thinking in American companies. It’s an exciting read for those of us who believe that longer-term thinking will drive greater profits and prosperity.

My colleagues in the integrated reporting (<IR>) movement have shared some great thoughts about the letter including in the IIRC newsletter and the <IR> LinkedIn Group. But I think there’s more to say about how the vocabulary he uses in the letter connects with the integrated reporting movement. (I don’t know if he meant to connect with the <IR> vocabulary but I think the comparison is instructive):

We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation.

Integrated reporting is a framework for mapping and measuring long-term value creation. Its core concept is that each company has multiple types of capital. This capital is put to use in the short term to create value for customers, stakeholders and shareholders. But to be successful over the long term, this capital has to be put to work in a way that also preserves and hopefully increases the capital base for the future.

There’s nothing new about the need for companies to create short- and long-term value. What’s new is that traditional financials don’t capture two key types of capital that have grown in importance/attention. The first is the growth in the relative value of intangible knowledge capital (know-how, data, processes, designs, networks and even people). Since the rise of information technology a few decades ago, the intangible portion of corporate value has risen from 18 to 84%. Second is the growing realization that externalities like resource use and abuse are a relevant business issue.

We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth.

If you accept that the value creation system of a company includes tangible, intangible and natural capitals, these statements about “balanced capital plans” and “value-creating investment” take on new meaning. Companies spend enormous amounts of money on all of the capitals. Except for investments in tangible assets, this money is not considered capital expenditure so the accumulated effect of the investment is invisible (this is how the 84% corporate value gap happened).

When we wrote Intangible Capital in 2010, we included a chapter on what we called i-capex (intangible capital expenditure). I always thought that this would be a powerful place to start in measuring the capitals. It turns out that that chapter has been viewed as the most radical of all. Maybe the time has come to re-visit it?

But one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.

Everyone loves to complain that investors are short-sighted. But companies actually have themselves to blame in many ways. With such a large portion of corporate value intangible and off-balance sheet, the only hard data that analysts have is the income statement, which is by definition a short-term, backward-looking measurement. If we don’t give stakeholders (including investors) a replacement for what they used to get from a balance sheet, nothing will change. Which leads us back to the need for the framework that looks at the whole ecosystem…..

I’m actively working/looking for ways to build momentum for <IR> in the U.S. I have a short plan that I’m happy to share. I’d love to hear feedback here or email - adams at

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The Information Technology & Innovation Foundation (ITIF) is one of the best think tanks in Washington because they study how innovation drives economic growth. However, the ITIF largely ignores how intangible capital drives innovation and economic growth. In their recent report,

Contributors and Detractors:Ranking Countries’ Impact on Global Innovation,

they use an obsolete model of policy that almost completely ignores both intangible capital as a driver of innovation AND the methodology of innovation management as a driver of innovation.

The report focuses on measuring global competitiveness of innovation in countries with a model of innovation that is driven almost entirely by the traditional factors of economic growth such as deregulation to achieve free markets and global trade, availability of capital, protection of intellectual property, and tax incentives for funding R&D. The report considers "human capital" as mainly general higher education produced at universities. 

The ITIF is promoting an obsolete policy for competitive innovation that is like promoting an obsolete policy for competitive manufacturing that focuses mainly on capital investments in factories (land and buildings) and the unregulated cost of labor and labor conditions while ignoring the methodology of manufacturing management and engineering based on smart people with specific knowledge required to manage and operate modern assembly lines enabled by flexibility in sequence and the interchangeability of parts, assisted by Frederick Taylor's scientific management, expert knowledge of and application of quality management based on statistics, resulting in the competitiveness enabled by the principles and practices of a system of lean production and the relationships in supply chain management to achieve just-in-time, reduced inventory and maximized flow while controlling high standards of quality.

And of course, business success for growth in manufacturing requires the right products to be manufactured with validated market demand and value resulting from competitive innovation management with competitive strategy, organization, marketing, R&D, finance and HR based on tangible and intangible capital.


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An integrated view of sustainability

10468399680?profile=originalRecently, I had a great conversation with two people in the corporate sustainability office of a NY-based company. They have been on a journey toward changing their actions and their communications to become more sustainable from an environmental and social perspective. They were talking to me because they wanted to extend their practices to not just think about externalities but also what they called “internalities,” things like processes, change management and lean thinking. They saw this as an important advance in their sustainability thinking from primary focus outside their organization to an “internal sustainability” focus. They also said that one of their challenges continues to be that, as much as they focus on nonfinancial results, “financial will always trump how we make decisions.”

For me, this is the essence of the challenge that integrated reporting addresses: Until there is a reliable information set that is as trusted and consistent as the financials, the financial results remain the ultimate metric of success even though everyone agrees that financials fail to capture a lot of the critical drivers of profits and corporate value.

Many in the market still consider integrated reporting to be the marriage of the financial and the external sustainability perspectives. But this combination doesn’t give the full picture. To understand the full picture and have a truly integrated perspective, we need a view to both short-term financial and long-term sustainability (both external and internal). The <IR> framework provides a sound theoretical connection between the capitals and value creation. But it’s hard to see in practice.

For me, the starting point for application of these ideas has to be a model of a company’s specific drivers of financial and corporate value. This is one of the reasons that I continue to advocate for the use of a canvas-style format approach to mapping value creation. The approach that I’ve been using is the Value Creation Worksheet. I made a version of it available as an open tool on my website awhile back. Please check it out, contribute to its improvement and/or let me know if you have other suggestions on how to move this idea forward.

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10468399680?profile=originalNew Year’s resolutions are just like a lot of corporate goals. They start out sounding great but don’t end up happening as planned. That’s because the primary focus is on the KPI’s, not on building the system to deliver on the KPI’s.
Here's a simple (hopefully not simplistic) analogy: A person has a strategic goal to lose (or gain!) weight. The KPI for this is their monthly weigh-in. Just having the goal is a motivator. But to achieve that goal, a lot of things have to happen. If I’m going to judge their ability to meet the goal, I’m going to take an integrated view of what we call the value creation system.

A value creation system is made up of various kinds of capital. The value creation system this person needs includes the weight loss goal (strategic capital), the training they receive on how to do it (human capital), the support system they get of friends and maybe a nutritionist (relationship capital), a website, app or information they use on exercises or the diet (structural knowledge capital), maybe an exercise bicycle (structural manufactured capital) and an understanding of how their diet affects the environment (natural capital).

The value creation system is like a machine or a factory--it's infrastructure that a person or a company uses to fulfill its goals. For companies, we have good descriptions of the physical infrastructure in financials. But the most important parts are invisible. You need to make the system visible If you want to make the right decisions about how to meet your goals or if you want to get someone (like a bank, an investor, a partner or even an employee) to help you meet them. That’s why integrated thinking and reporting is a critical strategic tool.

If you want to make a New Year’s resolution for yourself or your company, take a systemic view. Here’s a value creation worksheet you can use to model and measure your value creation infrastructure. 

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An Integrated View of Chipotle

In recent weeks, Chipotle has been through a number of crises where customers have grown ill. The first involved e coli-infected in Washington and Oregon. This week, 80 students fell sick with the in Massachusetts. Because I like to use Chipotle to explain integrated thinking, I’ve been paying special attention to this news.

Integrated thinking can be a powerful way of understanding what drives a company’s success. I often use Chipotle and Taco Bell as an illustration of how to unpack value creation using corporate capitals. The two companies seem as different as you can be and still sell the “same” kind of products (tacos and burritos). Chipotle emphasizes their values around healthy and sustainable food. Taco Bell, around cheap food available for a late-night munchie run. Chipotle has different standards for its suppliers but they both have standards to avoid food-borne contamination. This table shows some of the differences (and similarities):













Consumers driven by concern for where and how food is sourced.

“Food with Integrity”

Processes for supply chain, food prep and restaurant management. Recipes. Store locations.

Low paid hourly workers.

Focus on sustainable production of ingredients.

Taco Bell

Consumers focused on price and availability

“Food for All”

Processes for supply chain, food prep and restaurant management. Recipes. Store locations.

Low paid hourly workers.

[no visible sustainability information on the website]




Costs and Investments


Reputation and Valuation

This simple analysis doesn’t begin to give either company justice but it gives you an idea about how to use the capitals framework to compare the two companies. Each company is attracting a different kind of customer (relationship capital) based on very different value propositions (strategic capital). Their processes and real estate strategies (structural capital) are probably pretty similar, even though their recipes and designs differ. Interestingly, they both rely on low-paid workers (human capital). Finally, there is a clear difference in how they talk about their environmental footprint (natural capital).

The reason that I like the capitals approach is that it forces you to consider all the components of the value creation system of a company. In the Chipotle food crises, the table prompts some thoughts:

  • Chipotle focuses on an important aspect of food quality: local, sustainable production. This is an important goal. But this is just one piece of the overall puzzle. They are largely silent on a lot of other sustainability issues such as water or air (and don't produce any kind of sustainability reporting).
  • They don’t necessarily focus on creating the best jobs for their workers. Livable wages are an emerging issue in this industry. Chipotle is probably with the majority right now in not focusing on wages and worker wellbeing as much as they might. And their recent one-day hiring campaign in September might have brought a large contingent of inexperienced front-line workers.
  • Their good intentions may or may not be backed up by rigorous processes. This is often the most important driver of success—how well you ensure that you, your suppliers and partners all live up to your standards. Recently, one of Chipotle’s co-CEO’s said, “The procedures we’re putting in place today are so above industry norms that we are going to be the safest place to eat.”

Many consumers are passionate supporters of Chipotle’s values. But values have to be backed up by a value creation system. The system includes people, partners, property, planet, all in service of your purpose. Problems are rarely caused by just one piece of the system. Fixing it requires an integrated, holistic view. I don’t have the answer to Chipotle’s issues. But I can offer integrated thinking as a powerful way to start asking the right questions.

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The model of integrated thinking that combines three frameworks – Integrated Reporting, Sustainability, and Intangible Capital is excellent, but the framework for innovation is missing. In the framework for innovation there is a debate over a traditional vs. a new framework. In the traditional framework, investment in R&D is considered the primary driver of value creation. But the debate is also about process. In the traditional framework, the process is linear with stage gates in a “waterfall” that begins with R&D. In the new framework, it’s nonlinear and iterative that simultaneously discovers needs and solutions that include patents, inventions and technologies created in R&D that spans companies, universities and governments. Steve Blank popularized the Lean Startup Movement (LSM) by showing how an iterative process is more effective for startups than the linear process. Blank is now analyzing R&D which is thinks is not effectively creating value. Here are references.

My thinking on a framework for innovation is that LSM is a subset of a larger framework described as the fourth generation (4G) of innovation management (and R&D) to emerge since 1900. 4G has twelve principles and practices. One is a new framework for capital accounting that combines tangible and intangible capital based on capabilities - people with knowledge, tools, technologies and process - and the structure of those capabilities governed by architectural rules.  The 4G model in this principle is similar to Integrated Reporting with multiple capitals including intangible capital and a process of value creation.  4G recognizes that radical innovation is necessary to create new value based on dominant designs to transform capabilities, business models and industry structures to change societies to achieve goals such as sustainability. Capabilities are the building blocks of value in organizations, markets, industries and societies. They can be measured, developed and shared in value chains and networks. Capabilities are similar to atoms in chemistry and physics. 

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Integrated Conversations at Sustainatopia

Right before Thanksgiving I attended Sustainatopia. It was the first time the conference was held in Boston (it started in Florida and has also been held in California). It’s a really broad group of people and discussion tracks including impact investment, smart cities, LOHAS (lifestyle of health and sustainability), sustainable strategies and innovation, empowering women and millennials.

I was on a panel with Dr. Stephen Jones, President of Antioch University New England. The Sustainatopia organizers chose the title of our session: Integrative Systems Thinking and Innovation. I have to admit I wasn’t sure if anyone would come (it’s a pretty esoteric title:). But we ended up with a few dozen people who were extremely engaged, including corporate sustainability officers who struggle with building bridges across their organizations.

Steve spoke eloquently about how nature is a wonderful guide to systems thinking. His view was a great companion to my explanations of the integrated thinking/reporting movement. The idea of the capitals is a great bridge to talk about the components of the ecosystems companies build.

The conversation got really interesting when we started talking about innovation. I shared the research my firm did a number of years ago that showed that while most innovation efforts are focused on creating processes, these processes often trip on structural barriers involving missing/mismatched capitals (the right people, culture, connections etc). We had a great group in the room and had a lot of input and questions from the participants. It’s clear that the audience saw the link between innovation and integrated thinking. It’s a good reminder to those of us who talk about integrated reporting that the integrated thinking behind it has far-reaching influence.

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A U.S. View on Integrated Thinking and Reporting

In the last month or so, I’ve attended a program on Integrated Reporting and another on Integrated Thinking in New York, both organized by Skytop Strategies. Skytop has been boldly moving forward with an agenda of programs designed to bring together a diverse group of integrated thinkers in the U.S.

I’m excited that there is a growing community in the U.S. And it’s fun to compare and contrast the movement here with what I saw at the IIRC Convention in London. First of all, it’s important to note that, while the U.S. community is watching the integrated reporting movement closely, it is not following the model faithfully (not that anyone is—the idea is to allow diverse experimentation around the world). And in the U.S. it’s less about the reporting side of things. In fact, if you look at the IIRC examples database for North America, you’ll see just ten listings. To date, only Clorox and Smithfield Foods specifically call their publications “Integrated Reports.” Other companies bring integrated thinking to their traditional and/or sustainability reports. And many more (in U.S. and abroad) have their own names like net positive (King Fisher), net good (British Telecomm), total contribution (Crown Estate), shared value (Nestle) and net-works cycles (Interface). Others included core capacity, accountability, systems thinking.

So reporting is just one part of the story. (Many would say that reporting is just a catalyst to drive integrated thinking and that the thinking is the ultimate goal). In his keynote at the Skytop Integrated Thinking Symposium, Ralph Thrum framed this by talking about moving beyond the “license to operate” perspective of sustainability and CSR to a concept of thrivability and a “license to grow.” I like this because it gets to the area where I have always used these ideas: to use integrated thinking to drive growth and innovation.

My contribution was on a panel about what’s missing in existing guidance. I had laid out my position in Integrated Thinking: What's Missing that the roots of the movement really come from people trying to unite two completely different conversations—traditional and sustainability. . It was clear in both London and New York that this is still the driving dynamic. But these two are missing the internal sustainability view that takes into account the non-traditional, intangible assets that drive a company’s value creation capabilities.

It’s still early days for this movement. But I’m excited by what Skytop is doing. I met some great people and heard a lot of honest assessments by people on the frontlines striving to integrate thinking across their organizations. Skytop has lots more programs coming up including a deep dive on preparing an integrated report hosted by VMWare in January that will include a presentation by Clorox on how they developed their report.

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Report from the Integrated Reporting Convention

As part of my journey to using a more fully “integrated” framework of the capitals that form the foundation of today’s companies, I attended three conferences in the last month (phew!). They came in quick succession and I’m still digesting it all. But I promised a number of people in our community that I would share some impressions. Here are some first thoughts with more to follow.

I’m going to start by sharing what I learned at what was billed as the Official IIRC Convention. The one-day meeting included good mix of corporates doing IR, representatives of professional bodies (IIRC, CIMA, GRI etc) and different kinds of advisors. There was no attendee list which seemed strange to me but may be a European thing. My view is that these are the early days of the movement and there would be value in building the network, letting people know who else is interested.

One of the key sponsors was CIMA which shared their FM Magazine Leadership Special Issue (available for download at Amazon).  Released at the conference, there was a great history of integrated reporting going back to Nelson Mandela in South Africa. The article explains that Professor Mervyn King, considered the architect of the <IR> movement:

Came up with the concept after being asked by Mandela, who was soon to be elected president of South Africa, to redraw the nation’s corporate governance system for a society starting to emerge from the fast-crumbling apartheid regime.

The first steps were to address sustainability but “the problem was that firms started doing this completely separately from financial reporting.” This led to the concept of reporting holistically about value creation including all of the six capitals. The work of the King Commission was picked up by the UN and eventually led to a summit convened by the Prince of Wales that included standards boards from around the world. The IIRC was born out of this effort.

The movement is now to the point where some 1,000 companies around the world produce integrated reports. This is tiny on a percentage basis but more and more companies are beginning to talk about integrated reporting and what it might mean for them. At this conference, there were over 180 people from 24 countries. There was a good mix of vision, theory and practice. There were some great stories from corporates like Nestle, Generali, DBS, Enagas, all of whom produce different kinds of internal and external reporting which may or may not be called an “integrated report.”

Just a few ideas that stuck with me:

  • In a panel on investor decisions, there was a powerful message that the money invested in companies can be traced back in large measure to savings and pensions. This means that the investment goals are long term in nature. But the predominant outlook and management of these funds does not take the long term into account. This is a natural starting point for discussions about <IR>.
  • There were many calls for comparability but also insistence that the capitals are examples and should be flexible (my position is that every company has these six capitals which is a start toward comparability)
  • Focus on "capitals" which implies a stock but use of impact metrics (inputs, outputs and outcomes) that measure flow (I think this comes from the sustainability movement and in my view will need to be adapted; this kind of impact analysis is not long term in focus).
  • The capitals discussions mostly skimmed over the discussion of internal intangible assets (called intellectual capital in the IIRC model). The one formal mention I saw from a panel focused on intellectual property and R&D (most people are still missing the processes, data and knowledge that provides the core infrastructure of every company).
  • In a sea of talk about KPI’s, some interesting examples of qualitative measurement (one of my favorite topics). In the integrated thinking discussion, the panel used clickers for immediate audience polling and real time qualitative data. Jones Lang Lasalle told the story of how they used qualitative data from stakeholder interviews to inform quantitative analyses. If you’ve known me for any length of time, you’ll know that I believe that qualitative is part of the future of integrated thinking, if not integrated reporting (the easiest way to know whether you’re meeting your stakeholders needs is to ask them).
  • Nevertheless, I was less thrilled to see frequent use of stakeholder feedback as a basis for judging what's material for reporting. For me, materiality should be tied to a company’s value creation ecosystem, which the capitals are perfectly designed to address. There was a lot of talk about differing materiality standards. As is often the case in life, it depends on the context.

Bottom line, there’s a lot of interesting work being done internationally. What does that mean for U.S. companies? I’ll take that subject on in my next post.

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Integrated Thinking: What’s Missing?

10468399662?profile=originalI’m happy to be speaking on a panel Thursday at Skytop Strategies’ Symposium on Integrated Thinking. The panel is called Drivers of Integrated Thinking: What’s Missing from the Existing Guidance.

Sounds pretty esoteric right? Well it’s actually a hugely relevant conversation. Today, every company in the U.S. produces financial statements. And many produce some kind of sustainability statements (for the largest 250 companies in the world, the figure is over 95%). A lot of money and thought is invested in these two perspectives. But they are isolated in their own ghettos and most people have a hard time reconciling the two.

You'll see this in action if you go to a public company’s website. There is a section for investor relations where you can find the traditional financial reporting. There is usually a completely separate section for sustainability reporting (often harder to find). And there are rarely cross-links to take you, for example, from the financial to the sustainability reporting.It’s almost like alternate realities for the same company. Which makes sense on one level—the two kinds of reporting serve different purposes and have different stakeholders. But it begs the question for many—why are these two separate? And, at a deeper level, why is the thinking behind these two perspectives separate? And how can they be connected? This is the goal of integrated thinking. And for the companies taking on this challenge, it's the goal of integrated reporting.

Here’s the key point I want to bring to the discussion:

Traditional + Sustainability ≠ Integrated Reporting/Thinking

What do I mean by this? Traditional reporting/thinking is basically focused on how a company created (or not) shareholder value in past periods. Sustainability reporting/thinking is how the company created (or not) stakeholder value in past periods. But to be truly integrated, we need to ensure that a company ensures its own survival—creates corporate value—while meeting the needs of its shareholders and stakeholders. I’ve increasingly been using the phrase “sustainable value creation” to describe this, which is defined as:

Using the capitals (tangible, intangible and natural) available to a company in a way that creates value for shareholders and stakeholders today…and that also preserves/enhances the company’s ability to create value in the future.

In light of this definition, what’s missing from the various forms of guidance influencing integrated thinking? In my view, we’re missing a way for companies to take responsibility to their capitals, for building and maintaining an infrastructure that gets better every year. In our industrial past, explaining this was the job of the balance sheet. In fact, the tangible capitals on the balance sheet explained over 80% of corporate value. Today, they only explain 16%.

It’s like the instruction we receive on a plane: put your own oxygen mask on before you help others. Companies have to create value for shareholders and stakeholders in a sustainable way. And by the way, (with the exception of short-term traders) shareholders and stakeholders want that to happen too.

I look forward to discussing how to accomplish this at the Symposium!

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From IC to IR: Why I’m expanding my focus

If you have talked to me for any length of time about what I do, chances are I’ve quoted the story about the Blind Men and the Elephant. It’s because it’s a clear way to explain the challenge of measuring and managing business today when all the critical pieces of a business are literally invisible and/or not included in traditional financial reporting.

Why am I trotting this out yet again? It’s because I want to go on the record saying that I feel like one of blind men in the poem. You see, I’ve been talking about helping people see the full picture but I’ve still only been talking about part of the elephant.

What’s changed? I’ve had more people from the sustainability movement approaching me to talk about intangibles. And I’ve been spending more time getting to know the ideas and people in the integrated reporting movement. Essentially, integrated reporting is trying to unite at least three perspectives: traditional accounting, sustainability and intangible capital.

For those of you who have shared my interest in intangible capital, you’ll see that this new uber framework largely includes the IC perspective.* But it adds natural capital and more explicitly includes traditional accounting. As it should. Maybe as we should have. That’s why I decided to bring up the elephant. As much as I talked in the past about seeing the whole elephant, I was still leaving out part of it.

So what does this mean for Smarter-Companies? Well, everything and nothing changes. 100% of what we have been doing is applicable in the integrated framework. We’ve already added natural capital to our open source value creation worksheet. We also included it in our ValueRabbit measurement platform.

But I am spending more time learning and sharing with a whole new group of people. I’m going to be on a panel at a Skytop Strategies program next week on Integrated Thinking. I’m going to the first ever Integrated Reporting Convention in London the week after that. And will probably spend time with the incredibly diverse group at Sustainatopia in Boston before Thanksgiving.

As always, I promise to share what I learn and look forward to conversations about how to use good ideas and good practice to build healthier companies and communities. Let me know what you think!

*For those of us from the IC world, I feel the need to acknowledge your confusion. For us, IC has always been human, relationship and organizational/structural capital. The IIRC uses the phrase “Intellectual Capital” to describe just the third capital in our traditional framework, owned knowledge in its many forms. But we have too much to contribute to the conversation to get hung up on this. Let’s get busy and share what we know to advance what is, after all, the right cause.

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