Member Blogs

If we don’t understand where the innovation value resides we will certainly struggle to continue to build innovation’s position in the organization. Today innovation is still regarded as ‘expendable’, sacrificed on the altar of short-termism.  This creates a growing uncertainty, often reducing innovation down as that no real ‘sense of urgency’ and becomes ‘contained’ in discrete projects, failing to offer that real, substantial, ongoing value for the enterprise.

We simply don’t ‘unlock’ the real value of innovation. If we lack the understanding and abilities to build this sustaining operational capacity for innovation we have ongoing problems. There is the need as its longer term goal, to be simply fully embedded inside the organization that it ‘resides’ and simply becomes indistinguishable, it becomes the operating core, constantly aligned to the strategic needs and goals. Innovation’s benefits must be outstanding.

Value creation should be a core business strategy.

Why do we have such difficulties explaining the value and benefits from innovation? We need to tackle this, the earlier the better. Innovation is made up of both tangible and intangible value. It is until we recognize the underlying capitals that make innovation capital; we will always fall short on providing its real worth.

Innovation outcomes are far more explicit if you understand these capitals that make up innovation. These are often called the intellectual capitals or stocks of (potential) value. These can be financial, manufacturing but more the human, social and relationship capitals.

These capitals transform raw ideas into the commercial outcomes. Working these capitals the value of an organizations stock can be enhanced or simply preserved and can equally diminish if not managed well and thoughtfully.

How best can we explain value / value creation?

1. Firstly value is the total of all the capitals I mentioned above; we need to understand what ‘makes these up’ in our organization. These are unique and when applied generate new innovation capital
2. Also value is the benefit captured by the organization, it is outcomes (of innovation and other things) to generate the market value and present and future cash flows within organizations.
3. Value can also be the essential achievements of the organizations objectives, it can be value created by the organization itself or by combining with others.

Failing to articulate the value creation of innovation

So if we can’t explain the make-up of the intangibles within innovation we often simply fall back on generalizations, non-descriptive and self-referral nods to ‘improvements’ and ‘cost savings’ and that tends to group ‘benefits and value creation’ into incremental gains. Surely we can do better than this?

We must start looking for more strategically important outcomes; we must unlock the knowledge and raw data and translate this into tangible results that can be clearly seen. To achieve this innovation needs to align itself to strategy and the organizations objectives.

Innovation will remain tentative, always stuttering along, lacking this absolutely organization innovation rhythm if it is not fully understood in where it generates it capital from and what new capital and stock it provides.

The long-discussed and reviewed merger of American Airlines and USAir has finally gone through. It is the latest in a series of bankruptcies and mergers that have turned twelve airlines into four .

Mergers have a very bad record in general because more often than not, they fail to deliver achieve expected benefits. Airline mergers have an even tougher time because the industry struggles to make a profit. So there should be interest in using information that would improve the chance of the success of mergers and acquisitions. But there’s enormous momentum in our financial and accounting systems even though they miss a lot of the story in today’s businesses.

The Accounting for the American transaction hasn’t been disclosed yet (although here’s a long but interesting discussion of how the accounting might look) but there eventually will be a consolidated balance sheet of the combined entities.

Of course, the GAAP balance sheet won’t include many of the most important assets of the two organizations. Things like:

• Human Capital – Unionized workers, unionized pilots, training systems, core competencies
• Structural Capital – Systems to support reservations, route management, maintenance. Rights for routes and landing slots in airports.
• Relationship Capital – Customer relationships. Relationships with suppliers and regulators. Brands and reputations.
• Strategic Capital – Business models, culture and external market opportunities.

What if there were a consolidating and consolidated inventory of these “intangible” aspects of the two organizations? It would tell us a lot more about the prospects for success of the transaction than any of the raw numbers would.
Even better, what if there were an objective evaluation of the relative strength of each of these assets in the two organizations as a guide to how the consolidation should be handled? It would provide greater transparency among management, employees, customers, partners and regulators. And, based on our experience, lead to better decisions and, who knows, maybe even a profit for the combined airlines!

If you look at the reporting about this deal, most of it is about the intangible capital of the two airlines. However, since there is no ICounting available, the best we get is isolated pieces of a jigsaw puzzle. Here’s hoping that businesses catch on and start pulling the full puzzle together before the deal closes…

To quote from the release:

 The release of the International Integrated Reporting (<IR>) Framework on Monday 9 December 2013, marks an important milestone in the market-led evolution of corporate reporting.  It follows a three-month global consultation led by the International Integrated Reporting Council (IIRC) earlier this year, which elicited over 350 responses from every region in the world, the overwhelming majority of which expressed support for <IR>.

<IR> applies principles and concepts that are focused on bringing greater cohesion and efficiency to the reporting process, and adopting “integrated thinking” as a way of breaking down internal silos and reducing duplication.  It improves the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.  Its focus on value creation, and the ‘capitals’ used by the business to create value over time, contributes towards a more financially stable global economy and is a force for sustainability

The Framework will be used to accelerate the adoption of <IR> across the world, where it is currently being trialled in over 25 countries, 16 of which are members of the G20, the group of nations focused on strengthening the global economy.

IIRC Chief Executive Officer, Paul Druckman, commented:

“We will use the Framework, together with examples and evidence of the business and investor case, to reach out to a wider pool of businesses who are seeking to adopt <IR> for the first time. 

It is the right time to participate in the journey towards a better, more cohesive reporting landscape that makes sense both to businesses and to the decisions of providers of financial capital, in this interconnected, complex and resource-constrained world.”

http://www.theiirc.org/international-ir-framework/

 “Building resilience and sustainability into economic orthodoxy and business decision-making is core to the IIRC’s long-term vision – to provide a solution to the uncertainty, instability and volatility of the today’s global economy.”- Paul Druckman, CEO, IIRC

“The release of the Framework signifies a step-change as more and more businesses begin to adopt Integrated Reporting as a means of telling the company’s complete story, and how it creates value, taking stakeholders on a much deeper journey of understanding.”

The International Framework is a catalyst to bring about profound changes in business and investor behaviours. The cycle of integrated thinking and reporting, resulting in efficient and productive capital allocation, will act as forces for financial stability and sustainability.

http://www.theiirc.org/event/new-lord-mayor-fiona-woolf-welcomes-the-international-integrated-reporting-framework-with-professor-mervyn-king-sc/

Released today 4th December 5PM Uk time.

There’s a wonderfully thoughtful new article by James Saft at the International Financing Review about a recent Fed examination of rise of both corporate cash levels and intangible capital.

It seems that

“Using a new measure, we show that intangible capital is the most important firm-determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together,” Antonio Falato and Jae Sim of the Federal Reserve and Dalida Kadyrzhanova of the University of Maryland write.

Saft’s theory about what’s happening (which makes sense to me) is

Having more of your value invested in and represented by intangibles creates some problems. For one thing, unlike a factory building or a piece of machinery, you can’t pledge intangibles as security against a loan. That makes borrowing more expensive or even, if a company is in distress, impossible. It follows then that firms with high levels of intangible capital, which is just about everyone, would hold more cash in order to keep their options open, either for investment or acquisitions or simply to weather the inevitable storms.

But then Saft goes on to say

One partial potential solution might be to make it easier for firms, perhaps through banking regulation, to borrow against their intangibles. That might encourage them to keep less cash on hand and invest more. It also, of course, might lead to banks going bust when they find it impossible to measure, much less seize and liquidate, the intangibles pledged against a loan.

Would banks go bust if they try to measure and liquidate intangibles?

It’s a question answered in a number of papers by my colleague Ken Jarboe at the Athena Alliance.

It’s also the question that led me as a consultant and former banker to create the ICounts toolset. Every company should have a basic information set about their intangibles, not only to show to their investors and bankers but also for their own internal management.

What does a basic information set look like? It’s not that different from what you use with tangible assets:

• An inventory of key intangibles
• A visual/canvas that maps the connection between these intangibles and financial results
• A measurement of the health of these intangibles

This kind of ICounting information isn’t a guarantee that banks won’t lose money. Accounting isn’t a guarantee either. The point is that intangibles are way too important to the ability of a company to succeed and to generate the cash it needs to survive. Banks should want this information today.

My vision is that some day in the not-too-distant future, banks will be willing to make more loans to companies with high intangible levels. In fact, it’s an opportunity for the right bank right now. Curious to know more? Join our movement for measures that matter.

Earlier today Paul posted an item on the experiences of the Generali Group of Italy using Integrated Reporting.  Does anyone else have examples of/ experience with companies who are using the IR format already - as part of the IIRC's pilot? I heard that the framework is mandatory in South Africa - it that correct? It would be especially interesting to see any of the actual reports. FYI - the IIRC pilot runs until Sept 2014.

The Generali Group, an international insurance company based in Italy, is a pioneer in bringing to life the Integrated Reporting “internally”. Here, Massimo Romano, who leads Generali’s group integrated reporting team, discusses the benefits that they are detecting.

Integrated Reporting helps us in defining a more complete value creation story to be highlighted to our investors, therefore we asked ourselves: why not use the same concept to drive a more transparent approach inside the company, improving our team engagement? One of the biggest benefit from Internal Integrated Reporting is that we have begun to break down “thinking silos” inside our own department. Now we can leverage continuous innovation and integrated thinking to translate financial and non-financial information into reporting instruments that support our decision-making process within the Group, and drive the connectivity of information among our people.

In addition to financial capital, Internal Integrated Reporting now tracks human capital, social capital and organisational capital. The latter capital is a term that we use to encapsulate the tacit knowledge, systems, procedures and protocols employed in the company.  Each capital has a number of KPIs associated with it, that together enable us to deliver an integrated view of performance, inside and outside the organisation. These KPI’s are aligned with our Performance Management program and this is a fantastic approach in order to increase both the transparency of our internal communication and the engagement of our people towards our targets.

We hope that the output of the Integrated Reporting team will be useful to a wide range of internal stakeholders: investor relations, senior management, corporate services and subsidiary companies in the group, as well as to our external investors.  This is because the same integrated thinking process can create a wider range of different views on the same data.

Internal Integrated Reporting is developing within Generali, as the team becomes more familiar with how we can utilise the concepts of  the International <IR> framework. The initial version of Internal Integrated Reporting reported on KPIs by each capital, but newer versions will show how the KPIs connect with different capitals, interact with, and impact each other.   Such a reporting method really helps us track our achievement of strategic objectives by concentrating on three pillars: focus, discipline and simplicity. We have fostered an environment which encourages personal and professional development in line with group values. Another innovation is the bottom up approach in preparing the Internal Integrated Reporting which is made by our people who volunteer – on an annual basis – to be part of the working group in charge of the implementation and writing of the Internal Integrated Reporting

When our team started working on the Integrated Reporting, we realised that the introduction of additional capitals (over and above financial capital), and the increased connectivity of information from the <IR> process was helpful in giving visibility to the full range of factors that materially affect the ability of the my department and the company to create value. Our realisation that this could in turn aid our internal reporting has proved to be a great way for everyone to gain greater internal visibility, leading us to work collectively in an holistic way to a better understanding on how our department contributes to the company value creation process. We are piloting our Internal Integrated Reporting within our Group and this is an innovative milestone in our long term journey toward our Integrated Reporting target.

Reference http://www.theiirc.org/2013/11/26/the-generali-group-explore-using-integrated-reporting-internally/

INTEGRATED REPORTING PROMOTES A MORE COHESIVE AND EFFICIENT APPROACH TO CORPORATE REPORTING THAT DRAWS ON DIFFERENT REPORTING STRANDS

I’ve been working through the report from the IIRC entitled “IIRC pilot programme year book 2013”. It provides a useful summary of their progress, offering examples of organizations and how they are tackling this IIRC concept. Perhaps it is worth reading

My continued concern is that the Intellectual Capital movement may have not got its message across as well as others within the ‘capital’ mix. Clearly there is a significant improvement but it does seem the IC components are being broken out and that is good. Does anyone who might be closer to this ongoing process have a clear view of the fit or not of IC within this movement? I just feel it what I’ve read it might be under represented, hopefully I’m wrong

Their summary “The Capitals in a Nutshell”

Every business uses different types of capital to create value. These capitals become inputs to business activities. In the process of becoming an organization’s outputs, they can be increased, decreased, enhanced, consumed, modified, destroyed or otherwise transformed.

Different capitals apply to different organizations, depending on the level of their dependence or impacts on them.

Examples of the capitals include (taken from the report):

FINANCIAL : Funds available for use in the production of goods or provision of services; obtained through financing, or generated through operations or investments.

MANUFACTURED : Buildings, equipment, infrastructure.

HUMAN:  People’s competencies, capabilities, experience, and motivations to innovate.

INTELLECTUAL : Organizational, knowledge-based intangibles, including: intellectual property, “organizational capital” and intangibles associated with brand and reputation.

SOCIAL AND RELATIONSHIP:  Relationships with stakeholder groups and other networks, and the ability to share information to enhance well-being. It includes relationships with key external stakeholders, such as customers, suppliers, business partners, communities, legislators, regulators, and policy-makers – an organization’s social licence to operate.

NATURAL :  All renewable and non-renewable environmental resources and processes that provide goods or services that support the prosperity of an organization.

I like one of the visuals within the report:

So do you think the IC movement is well represented within this IIRC capital view?

I’ve just started working out of WorkBar in Boston. One of the many cool benefits of working here are the special programs for members.

On Friday there was a talk about coffee given by Equal Exchange (EE) based in Bridgewater MA. As I thought later about the presentation, I realized that it was focused on outlining EE’s intangible capital without ever using the terminology. 

Here’s what they talked about (annotated for ICounting:)

• Human Capital – EE is a worker-owned cooperative. Each of the 100+ employees has an equal vote and receives a share of profits. The highest paid employee does not earn more than 4x the lowest paid employee. Everyone earns a livable wage.
• Relationship Capital – EE does business with companies/organizations like theirs. The presentation included pictures of the farmers and talked about the programs they have to educate farmers about sustainable methods as well as how to grow beans that produce the best possible coffee. On the customer side, EE focuses on cafes/facilities where their story and value resonates.
• Structural Capital – EE is a coffee roaster. There is considerable knowledge within the company on this process. There’s lots of other knowledge about sustainable business practices and, of course, coffee. A lot of the presentation was an informative overview of different brewing methods and other factors that affect the final taste of a cup of coffee. The company has some nice cards they use to explain these different methods.
• Strategic Capital – EE has built a good business by connecting with cafes and consumers who share their values and interest in good coffee. Their values and culture are a key part of their value proposition and a big reason why they are able to compete in a crowded market.

When we talk about intangible capital, people often think we are talking about something abstract and esoteric. But it’s really a very practical set of ideas. And it explain why and how organizations are able to generate revenues and profits, including EE. Can’t get much more practical than that.

That's why our movement advocates for identifying and measuring intangible capital in organizations--because IC is the heart, soul and fuel that drives success in today's markets. Try the exercise for any business you know. Feel free to use our ICounts open source tools.  You'll see how important intangible capital really is to its future success.

We had our first big change to one of our open source products this week.

It‘s a change to our ICounts Canvas that was submitted by Mindaugas Cerpickis, an ICountant from TPA/IPR Plaza in Amsterdam. The changes are mostly related to format but they feel really big to us because they increase the understandability and usability of the tool.

[Background details on the change: This tool was originally adapted from the Business Model Canvas developed by Alex Osterwalder (his tool and, of course ours as a derivation, carry a Creative Commons Attribution Share Alike license). Our original adaptations enhanced their tool with more intangible detail but left the order with operations on the left and customers on the right. But that left revenues on the right and costs on the left—and the message about the links between intangibles and the financial results is important to us. It also meant that the steps of our ICounts Inventory started on the right. So reversing the order made everything much more straightforward, an elegant solution]

The change is important and nice. But for me the really big news is that this was the first big change submitted by the users of our tools. I know that open source software communities often have enormous numbers of people and changes flowing. But everyone has to start somewhere. And the idea that we can create a suite of open source tools that empower mainstream businesspeople to begin to explicitly manage and measure what really matters in their businesses (the intangibles)—it’s priceless.

We have created a Hub on our website for this and future changes. We’re still working on the format. For example, maybe we should have a separate discussion for each tool even though they are often inter-related? Keep the ideas flowing. And thank Mindaugas for getting us started!

The UK Intellectual Property Office has released its final report on Banking on IP? The role of intellectual property and intangible assets in facilitating business finance. A summary of the findings is also available.

The report provides a comprehensive description of the state-of-play on the role of intangibles in financing in the UK. It covers not only the current status but also the problems and barriers. In that regard, the report offers two overarching conclusions:
• A 'resource toolkit' must be put in place, aimed at helping SMEs, lenders and other financiers to make more effective use of the value IP and intangibles represent within businesses.
• The programme must build on existing initiatives.

The report also offers 10 specific recommendations:

1. IP and intangibles must be identified during the financing process. For IP and intangibles to be given any consideration within credit decision-making, tools to identify and describe the actual assets (not merely evidence of expenditure) need to be embedded within the lending process. Businesses must use them, and lenders must understand and take note of them. This step will have the wider benefit of boosting IP awareness amongst the business community as a whole.

2. The value of IP needs to be taken into account. The most important step in harnessing IP value is to realise that this value is not nil, and therefore requires active consideration. Robust approaches to determine the value of intangibles exist in the same way as for tangible property and are now included alongside them within the Royal Institute of Chartered Surveyors' Red Book, regarded as a banking industry reference point.

3. Due diligence guidelines can help to control costs. Checks will be needed in order to create confidence that the ownership and quality of the IP and intangibles are understood, that they contribute to serviceability and cash flow (particularly in the case of debt finance), and that their maturity is in line with what it would be reasonable to expect, given the development stage of the business. This will require templates, training and/or access to professional advice, at a cost that lending margins can support, within a turnaround time that meets business requirements.

4. More effective charges should be part of the lending package. Once knowledge assets are captured and verified, it becomes possible to create a proper interest over them. Legal templates and the resource toolkit will help lenders to achieve this at modest cost, firstly by providing appropriate wording for the instruments, and secondly by providing guidance on the procedures which must be followed when recording them.

5. IP markets and IP financing could be facilitated through infrastructure improvements. The development most likely to transform IP and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded. This is a domain where services must stand or fall on their commercial merits; however, the available infrastructure needs to support rather than impede their establishment.
In particular, as IP and intangibles become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the co-operation of official registries and the establishment of administrative protocols.

6. On-going management of IP and intangibles should also be supported. IP does not stop being important once credit is granted. The asset class is unfamiliar, and lenders will need assistance in understanding it, monitoring it and encouraging businesses to use and protect it so that risk is reduced. There could be a role for the introduction of 'milestones' (as used in equity and venture debt) and impairment tests to ensure that businesses are well informed and motivated to adopt appropriate IP management practices.

7. Affordable risk mitigation strategies are to be encouraged. Alongside certain guarantees, access to appropriate insurance policies to guard against unforeseen events could greatly increase banking confidence in adding further weight to IP and intangibles within the lending decision. There is private sector appetite to provide these if lenders are willing to create the demand; more detailed dialogue on the requirements of both parties is urgently required.

8. Asset-based financing techniques should be adapted for IP and intangibles. Recent financial upheavals have triggered something of a return to first principles in lending and a greater emphasis on assets for business finance (reflected, for example, in 'challenger' bank activity). This greater emphasis on assets needs to be extended to include IP. Alongside mainstream lending, where EFG is an obvious area of focus, asset-based finance and alternative financing methods should therefore be targeted for IP-backed finance interventions; these are the parts of the finance industry most accustomed to understanding and assessing individual assets and their value.

9. Steps to stimulate private investment need closer study. IP rights can be well suited to securitisation (patents, trade marks, registered designs and copyright portfolios). Given the successful track record of venture debt, more work is needed to understand onshore and offshore fund appetite to support investment in IP-rich companies, working with fund managers that have the necessary expertise.

10. IP demands joined-up thinking. The Intellectual Property Office (IPO) exists "to promote innovation by providing a clear, accessible and widely understood IP system, which enables the economy and society to benefit from knowledge and ideas". It therefore has a role to play in scrutinising Government and finance industry initiatives to boost lending, to ensure that the assets produced by knowledge receive consideration. But the IPO is not the only player, and only when all involved appreciate that these assets matter will their true potential be unlocked.

Those overarching conclusions and their 10 specific recommendations mirror our reports on the U.S.: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. (The UK report also cites our studies.)

One of the most important statement in the report is the following on how to get started:

Initial activities may be best focused on cases where traditional security is known to be insufficient or unavailable. In these instances, it is important for a lender to capture as much as possible in its security envelope, since it does not have the comfort of 'conventional' assets as a fall-back. Unsecured lending in general, and applications to the Enterprise Finance Guarantee (EFG) scheme in particular, are places for banks to start gathering experience in dealing with IP and intangible assets - in the case of EFG, they can do so with a 'safety net'.

In the U.S., programs run by the SBA serve the same function. As we have been advocating for some time, the SBA should take the hint from the Brits and set up a pilot program using IP as loan collateral. At a minimum, SBA and USPTO (possibly working with the Federal Reserve and the Treasury Department) should commission a similar study. That would at least bring high-level attention to the issue and put options on the table.

(Tip of the hat to IP Finance for alerting us to this study)

Cross posted from The Intangible Economy.

When you have time (and interest) you might like to listen to these different views on Integrated Reporting.

They shorten down the understanding, offer quick value and give you a ‘sense of identification or not!

These are supplied by PwC to support their commitment to this

Enjoy…

https://www.youtube.com/watch?v=BAceVuBC1L8#!

https://www.youtube.com/watch?v=3xnuJgKsl9w

https://www.youtube.com/watch?v=Y0FUpp1rom0

Getting involved or just sitting back- something is stirring

Part two on the momentum within the Integrated Reporting Framework (www.theiirc.org )

The next step of a Consultation Draft of the International <IR> Framework

According the website after a successful three months of engagement and the launching the Consultation Draft of the International Framework at events in 10 of the world’s largest capital markets, extensive consultation has taken place with organizations across the world. From South Korea to Sweden, Italy to Indonesia, and the Netherlands to New Zealand people have evaluated and commenting on the Consultation Draft.

The IIRC are using received submissions to shape the Framework which will be published in December 2013.

We certainly require more integrated thinking for us to all gain this greater sense of identity.

 If we can achieve a means of presenting the material about the organization’s strategy, governance and performance on commercial, social and environmental issues then this is a significant step forward. By the ability to effectively connect these often siloed areas, businesses are able to provide not only an update on past performance but also a long-term perspective of future value generation.

Integrated Reporting is, therefore, potentially moving us to good, or at least, better reporting. It provides and equips companies to manage their operations, brand and reputation strategically and to manage better any risks that may compromise the long-term sustainability of the business.

If this initiative does allow organizations to present their material information about the organization’s strategy, governance and performance on commercial, social and environmental issues in an integrated fashion

 Regaining engagement through in integrated reporting will benefit many.

I think this collaborative work can potentially advance some of the important areas we need, to regain the engagement within communities. Of course this integrated reporting will have far more initial value to the financial markets and direct investors but if we can begin to see a better, cohesive, articulated business story provided by organizations then it can begin to ‘flow through’ in many different ways.

Beyond the financial community, I think we can all gain by understand the specific business models better, we can begin to appreciate the assets that make up value creation far more and these will be far more based around the intellectual capital assets within organizations and we will begin to gain a higher sense of where innovation is contributing within this integrated reporting.

The value for us all is to become engaged in this work

I think this is a body of work that is well worth exploring and keeping engaged with, it may be a good catalyst for changing our thinking and attitudes and partly help us move finally away from antiquated reporting based on the last century and reporting on assets that are extremely limited on what is making up the real worth of one organization over another.

It is certainly about time that reporting within organizations became significantly better to understand where the real value creation is derived.  If the IIRC can offer a better integrated framework for reporting, something that offers a more cohesive reporting structure that is sadly lacking today, thirteen years into a new century, then we can all benefit from this better understanding.

We can then revise our views on the value and appreciation of what makes up the organization for its value creation – past, present and future – and then decide accordingly, if it has real worth or not going forward, from each of our unique stakeholder perspectives.

Can the IC community rally around this?

The first of two posts on the future opportunity we will gain by working with the IIRC initiative. These were triggered by recent comments to me by Kenan Jarboe on this work, so I went to investigated a little further

How do we engage within our own internal organizational communities? How do we communicate our sense of purpose to the outside world? How do we integrate all the activities we are (or should be) undertaking as responsible leaders?

Are we working towards understanding the material sustainability issues better and linking them to financial drivers and where we fit within these complex issues?

There is such an increasing need to develop or simply updating our business language to build stronger cases for change, improvement and broader community engagement but these still seem to be missing. How are organizations aligning their organizations not just with their own strategies but those in the wider world that contribute into a more sustaining future? We are needing to answer a fair few of these questions in my opinion.

The lack of engagement, of common understanding

Within each corporation there is this overwhelming need and growing concern to engage, to engage our employees, provide them a clearer sense of purpose and offer a better understanding of what a ‘higher’ purpose they are working towards looks like in their language not just through the eyes of the corporate board. How does the external world perceive us, how do we attract new investment, greater stakeholder engagement.  How can we achieve this in better ways than we are doing today?

Many of those traditional measures of purpose left over from the 20^th century are simply not working. The social contract between employer, employee and their communities has broken down and this ‘sense of drift’ is certainly making it far more difficult to galvanize each part of the renewing growth equation – including government – to fix it, to be part of a common united sense of solution that connect and resonate across all ‘vested’ parties.

The Integrated Reporting movement (www.theiirc.org )

I’m not sure how aware we all are on the work being undertaken under the auspices of the integrated reporting .    is a process that results in changing the communication mechanisms provided by an organization, most visibly a periodic integrated report, about value creation over time. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long-term.

Arguable much of the change to achieve Integrated Reporting needs to be driven by companies themselves and the development of the IIRC framework is enabling companies to shape the process based on their own experiences.

A useful starting place to pick up on this

A useful report to initially read is ‘Understanding transformation: Building the business case for Integrated Reporting’ that set out to understand the processes that companies go through as they move towards Integrated Reporting. The organisations participating in the research are at different stages but all are involved in the IIRC’s Pilot Programme, which aims to help develop an International Integrated Reporting Framework

Integrated reporting benefits, source http://www.theiirc.org/the-iirc/.

The work being presently undertaken

Over 100 global businesses and 50 institutional investors are directly involved in the IIRC’s work. This includes some of the world’s most iconic brands, such as Coca-Cola, Clorox, Microsoft, Hyundai, Tata, Unilever, Marks and Spencer, SAP and National Australia Bank.

Their engagement within the Pilot Programme are trialling the principles, content and practicalities of the Framework for two years to provide feedback and build business momentum towards its implementation.

By tracking their experiences over the two-year duration of the pilot, the aim is to capture the changes and benefits of adopting Integrated Reporting. This will help to build the business case for a wider shift towards Integrated Reporting and help to generate support among key stakeholders, including internal audiences, boards, investors and regulators.

The business and investor benefits of <IR> are seemingly compelling.

According to latest reports, the empirical evidence from the IIRC Pilot Programme shows that enables the articulation of strategy and how the business is creating value over time. This information potentially provides the new lifeblood of capital markets. enables a better communication of the material factors that create value over the short, medium and long term. It works towards investor decision-making and the efficient allocation of capital, essential aspects needed for us all to understand.

The question  is where does that fit for the parts derived from the intangibles and IC?

The signs are all around. LinkedIn’s endorsements. Social media wins and losses for companies (did you hear about JP Morgan’s Twitter debacle?). And this great comment by HubSpot founder Dharmesh Shah in Inc:

In the future, you won't just hit Ignore when you get an annoying sales call; you'll also be able to down-vote that phone number. Someday, we won't just see caller ID on our phones but also caller reputation. As new tools are developed, algorithms will do a much better job of evaluating a brand than an individual can, because algorithms will be based on thousands of data reactions.

What do all of these stories have in common? They are showing that measurement is moving from an inside-out activity (measuring using financial and quantitative indicators) to outside-in activity (measuring how stakeholders view the value you create).

At Smarter Companies, we focus most of our attention on intangible capital. That’s because this kind of asset already drives 80% of corporate value and 100% of competitive advantage of the average business today. (I shake my head every day wondering how much bigger the phenomenon has to get before people start paying attention…).

Intangible capital can and should be measured using inside-out metrics. But we focus our attention on the outside-in metrics. That’s because they are more powerful. And they are stakeholder-based. If you want to have a good leading indicator of an organization’s ability to generate growth, innovation and profit in the future, you’ll want to pay attention to whether a company is meeting its stakeholders’ needs.

It’s pretty simple on the surface. (Here’s an example of how we generate these measures). But it is ultimately revolutionary because it shifts the conversation about how to manage and build organizations. Measures that matter evaluate intangibles using stakeholder feedback. Do your measures matter?

The CEO of Rakuten Inc (largest ecommerce site in Japan) Hiroshi Mikitani, recently penned an article titled 'Passive Regression Could Kill Your Business' outlining his view on the value of the learning gained from making what he calls active mistakes. Active mistakes as opposed to passive mistakes!

His definition of a passive mistake is broadly one resulting from omission, caused by not taking action when one should. It reminded me of the Head in The Sand ....ignore it long enough and it will go away! How many businesses can we point to who just didn't get it when it came to the changes happening around and about them.

In the past few weeks, Blockbusters Inc closed it's remaining outlets in the USA. At one point, Blockbuster ruled the movie rental business with 25,500 employees, 8,000 stores and a distribution system of 6,000 DVD public vending machines. With annual cash flows of $500 million + it was valued at $ 8 billion. What happened?

Well, Netflix came on the scene and understood that the game was changing. Founded by Reed Hastings, Netflix developed a strategy of Internet streaming and convenient customer service to deliver a cheap, flawless customer experience utlilisng emerging technologies. They had vitually no sales employees, used a few warehouses and did not build a massive physivcal network of outlets across the country, rather they set up a virtual organisation. Netflix developed the best software platform in the industry; the cornerstone of a great customer experience......... with no late payment fees, no limited supply of the very latest movies, no having to leave the house and drive to a retail location. They deliver what the customer wants, when the customer wants, to a device the customer wants, all for a flat monthly fee.

Hastings knew that broadband would enable streaming movies over the net. Blockbuster must also have known this but it looks like they chose to ignore it. Instead, they pursued a strategy of expanding their instore offer to include toys, books and other merchandise. It seems they didn't even try to test a new business model. Thus, a passive mistake, and one that has cost them billions.

Making no mistakes of any kind is clearly best, but there is a gulf between passive and active. Active mistakes are opportunities to learn; they are lessons that we can apply to future actions and as such, are of value to us.

Businesses who are not scanning the environment; evolving customer needs, broader consumer trends, developing technologies and other drivers, are at risk of making passive mistakes. This sometimes stems from company culture, where it is not ok to fail. With this culture, people won't even try, they will 'keep the head down' for fear of making a mistake. Large organisations are often creators of such an environment, allowing bureaucracy to rule.

Being aware of the dynamics of the broader environment is such an important element in the decision making process. Most of these dynamics are intangibles that need to be recognised, understood and actively managed. Responding, trying different things and adapting to changing circumstances is a cornerstone of longevity for any company.

For as long as I have been interested in intangible capital, I’ve had this problem. I explain what I mean by intangibles and people immediately frame it within existing constructs. This sometimes leads to the elephant problem. But it also leads to the accounting problem. What I mean is when people like valuation professionals, accountants and finance people (among others) tell me that they’ve already got that covered.

And they do. Accounting, valuation and finance deal with intangibles every day. They identify, analyze, value, account for all kinds of intangibles. But they’re doing it within existing frameworks. And sometimes they look at me patiently (the nice ones try to avoid being condescending) and explain that there are actually very complex analyses to deal with “the intangible problem.” But they're missing the point. These complex rules try to shoehorn the assets driving the modern knowledge business (which is any company using computers) into an industrial-era framework optimized for tangible assets. This is how we end up with enormous amounts of goodwill in mergers and huge question marks about the value of new-to-the-market IPO’s where there is no visible value.

We’ve been trying to change the conversation for years. I finally came to the realization that changing the conversation required changing some of the vocabulary. I invented the name ICounts one weekend, trying out all kinds of spellings and letter combinations. I settled on the capital I and capital C to subliminally include IC in the words. It’s pronounced eye-counts. Practitioners are ICountants.

When I say the word and its derivatives, I almost always see an involuntary widening of the eyes in the person I’m talking to. Usually it’s accompanied by a little smile. It touches something, this new vocabulary. I think it resonates because it changes the conversation. And that’s ultimately what we need to do.

My father was an accountant. I was a banker for many years. I respect the importance that accounting plays as one of the cornerstones of our financial system. Will it change? Yes. But very slowly. And that’s as it should be.

But the world is changing faster all the time. And competitive advantage is now almost completely based on not what you own but on what you know. So we need to get serious about developing the same kind of information sets for intangible knowledge assets that accounting does for tangible industrial assets. These include inventories, charts of accounts and measures. That’s what we’re doing with ICounting at Smarter-Companies. We’re not threatening the existing system. We’re creating a parallel one. That’s the way you build new systems, outside the constraints of the existing ones.

A lot of what we’re doing is available in open source tools and discussions. Hope you’ll join in this [changed] conversation.

We need to tell the value creation story

The business model should be articulating how the company will convert resources and capabilities into economic value. It is the ‘transformation’ of resources into future potential value that tells us the “why and how,” in their potential, to decide to  invest or not, to believe in or not.Venture capital always looks extremely hard at the team within any start up or needing new capital. They seek to go under the bonnet and know what is making this ‘opportunity’ tick or not.

Financial statements are totally inadequate to evaluate today’s business

By not capturing the intellectual assets or all the knowledge-based capitals we are left with a totally out of date, inadequate set of financial statements. These today  totally fail to inform those on the outside as well as often those inside at the top of organizations, where the real wealth creation aspects lie.

We live far more in a knowledge based world that is generating more today than our physical assets yet we lack the ability to clarify this. We need measures, frameworks and clarity on where the knowledge lies and its make up in ways that capture these and can describe them effectively focusing upon the vale creation points that will exploit future opportunities.

The Business Model can be the crucial focal point, even more than today

We need to push for at least obtaining a narrative description of the knowledge-based assets and there is nowhere better than how organization’s management perceive their business models, what and where are the drivers and value propositions and how they are communicating on their strategies and value creation and the essential enablers of this.

Incidentally with effect from 1 October 2013 in the United Kingdom, organizations will also have to prepare a strategic report as a result of changes to the narrative reporting framework in the UK, intended to increase the quality of narrative reporting and introduce a clearer reporting structure. Can this go further?

We do need to refocus many of the fragmented debates around knowledge, our intangibles and intellectual assets and for me there is no better place than lifting this up to where the business model tells the compelling story or not.

We need to build the narrative story though the Business Model as a really different way forward within the debates around intangibles and how, where, and what.

Surely if we could begin to havrecognition, spoken off in valuable ways that others could appreciate, we would be sowing the seeds of change within organization. We can deal with any fear oif giving away potential IP, revealing t much through the Business Model or taking the opposite position the growing recognition of what does create the real wealth within the organization and those are the intangibles and the more we know of them, the better we can develop them into our unique advantage. I'd want to take the argue along the second path. Can we shift our combined thinking to offer a way to structure this that helps us out the impasse intangibles have suffered vear the years. We take a combined, concerted effort to alter perceptions and provide for the story to evolve and be told through the business narrative- I think it has momentum for IA to gain.

 If not, then don’t expect movement on individual frameworks, it confuses the market, We need a united voice. A standard for IA not variations as we have today.

How do we capture all the activities that have the potential to generate wealth within organizations?  Most remain hidden as they lie within out knowledge-based capital. So how can we capture and report on ALL our assets, both the tangible and intangibles? Are we being realistic?. Are we chasing after measurements, sometimes in a purists sense?

What do we loss in not becoming part of a balance sheet and becoming part of the strategic statement.

Knowledge-based capital today is more important to understand in its make up than often the reported financial numbers. One generates the other and investors need to see what goes into an organizations knowledge capital to provide them with continued confidence or not.

Recently the OECD provided an extensive report on “Supporting Investment in Knowledge Capital, Growth and Innovation”  This report ‘points’ towards one area I totally believe needs resolving, capturing knowledge and where it resides and how it works. Then we can begin to place increased focus upon improving the capabilities and capacities we all need for innovation to do its necessary work, that of regaining our growth and vitality in many markets. The problem is we often do not know which are the most valuable or critical to focus upon.

Also if we can capture this understanding well, the recognition, once and for all, that people and what they do is vital and often completely undervalued. The recognition of the importance of our intellectual capital we might begin to create more of the environments necessary to nourish it. To allow this ‘creating’ to take place more effectively than today and value it for what it truly provides.

The present impasse in grappling with this knowledge generating side within our business organizations has been a lack of regulatory requirement to disclose that much around any knowledge generating activity for fear of ‘revealing’ the competitive advantages. What is discussed is only what management chose to provide for giving a ‘certain gloss’ to their reporting or unyielding probing by interested parties. The IA community also seems determined not to put on a united, common front so the value with the multiple messages gets lost, ignored or simply don't gain identification with the very people who would want to understand this and adopt it for gaining a greater understanding of all assets contributing to their organization

Certain countries, especially in Northern Europe have been able to make far more headway on getting intellectual capital statements recognized and part of a annual reporting but these are still not easy to align and compare. Knowledge-based capital is far too important not to understand today. Yet we avoid embracing the idea, we prefer to reject this type of asset and capital reporting with cries of “too difficult”

The movement today is towards narrative formats

How can we move forward? The suggestion is narrative reporting. Generally speaking, narrative disclosure can take several forms: companies can publish an Intellectual Capital Statement or include a description of their intangible assets in the Management Discussion and Analysis (MD&A) section or the report on environmental, social and corporate governance (ESG) and sustainability.

What is recognized is that narrative reporting need not be purely qualitative. It can include some form of valuation. There is on-going argument this might be based on KPI’s tailored to an industry but realistically very few report on recognized KPI’s, comparable with others in their industry or field. Also how would you tackle differences in national approaches. Standardising our reporting has never been easy and when you contemplate ‘capturing’ more intangible aspects, it gets significantly harder. Yet we must try.

Let me offer one way, through narrative reporting in a further blog just to throw this open in this community?