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Value creation in today's world

Posted 13 June, 2018

A focus on value creation for your own organisation – the way to promote inclusion and long-term thinking

‘Purpose’ has become popular in recent times. It is a word now to be found in many CEO letters in annual reports, and used as a short hand for restating or redefining the social role of companies, at least in part as a response to a lack of public trust. Companies such as AXA, Eisai, Marks & Spencer, Schneider Electric, Unilever and Vodafone – to name but a few – are actively connecting their thinking and reporting to their purpose. In many ways, this is actually a return to an older concept of companies explaining and acting on their broader societal purpose.

This idea is taking hold, not just in the way companies articulate how they create value and for whom, but also in the way boards are encouraged to think and act. Successive changes to corporate governance codes around the world are putting a broader definition of value creation centre stage. Take the examples of Japan, and a governance agenda designed to understand and communicate better the true value of companies in capital markets; the Netherlands and the emphasis in their code on long termism; and the UK and the current discussion about s172 of the Companies Act and the role of the board in relation to the interests of stakeholders. And, as we know, the South African King code has put multi-capitals thinking at its core. The agenda is shifting to a broader understanding of value creation in which the emphasis is on the board taking a longer-term perspective and a holistic view of value created in the context of key stakeholders, to promote trust, resilience and a better world.

In this context, integrated reporting is vital to the international agenda. Just as we have global standards for accounting, which provides consistency and common languages for reporting, it is right that we should have a globally accepted framework for understanding value creation. It provides a context to allow organisations to consider ‘What value are we creating?’, ‘Who are we creating value for?’ and ‘How are we creating value for long-term success?’.

As our Council Chairman, Prof Mervyn King has argued in his recent address, we need to rethink the focus of business to meet the needs and challenges of the 21st century. And this view is supported by research conducted by the Association of International Certified Professional Accountants and Black Sun, in partnership with the IIRC, where 93% of respondents endorsed the need for a wider view of value creation.

We should therefore restate the currency of integrated reporting for today’s environment. Here are five points that will help organisations to respond to this agenda, that are core to integrated reporting:

  • Boards should ensure their thinking is centred on value creation for the organisation – focused on strategy and long-term outcomes. A ‘company centric’ model means that boards are considering purpose, strategy and business model in the context of performance and future prospects.
  • Boards should recognise that they can only adopt a successful strategy for long-term value creation if they genuinely identify their key stakeholders and ensure they are creating value for them, including understanding their needs and expectations. This is linked to reputation, social license to operate and responsibility through the supply chain.
  • Boards should adopt multi-capitals thinking – recognise the range of resources and relationships that they use and affect have intrinsic value. This includes understanding the trade-offs and impacts across the capitals, and both the negative and positive outcomes.
  • The demand for high-quality information by investors, especially on ESG, is growing fast. Boards can help investors with their need for relevant information that is communicated in the context of strategy, performance and prospects. They can also use integrated reporting to demonstrate how the board exercise oversight and a controls environment that are enhancing the quality and consistency of information.
  • Investors and other stakeholders are increasingly interested in the way the company does business – its values, ethics and transparency, reputation management, impact on the capitals. Given that the tone comes from the top, boards should use their reporting to show how their corporate governance is enhancing value creation over time, especially in relation to long-term outcomes. Too often we read about governance structures and representation: investors and others are also interested in the way in which the board thinks about and oversees value creation.

Conclusion

The direction of travel in the 21st century for the purpose of the company is clear. Businesses have to meet high expectations around the value created for society and their ability to deliver value that is consistent with the needs of sustainable development. Integrated reporting is more relevant today than it was when it was first founded. We have always talked of a movement whose time has come. But now with developments in thinking about the purpose of the company and ideas and the context of value creation, integrated reporting offers an essential solution to the way in which boards are being urged to think and act.

For more reading, please see issues of the IIRC’s Creating Value series on the board and on integrated thinking; and the report ‘Purpose beyond profit’. Further examples of integrated reports can be found on the <IR> Examples Database. Frank Bold also has good material on purpose of the company, and a report by Claremont Communications also makes strong connections to purpose.