Society is increasingly demanding that companies serve a social purpose and contribute to the greater good – which is leading to a new reporting. Authors: Jolanda Dolente and Mike Sills
To meet this change in how companies report their business, it is time to rethink how we account and report on organizational performance as many board members and executives are increasingly being asked to demonstrate how their companies are creating long-term value.
Organizations often report the wrong things by measuring what is easy rather than what is right. Most of the company’s value nowadays is related to intangible assets. These are not fully captured in traditional accounting creating a disconnect between accounting results and long-term shareholder returns. Items such as brand, intellectual property, talent, training, customer and employee loyalty, are just a few elements that we all know can “make” or “break” a company, yet, nowhere it is captured, quantified and evaluated.
Profit helps in a quick way to recognize short-term changes in revenues and costs, but does not account for investments made for the long term. Intangibles have increased from representing 20% of corporate value forty years ago to over 80% now in some industries. However, in the meantime traditional accounting methods have not evolved to measure the value of intangibles as they do with tangible assets. Disclosures are not adequately reporting the links to material risks and opportunities and they don’t reflect the full value of businesses.
To meet these challenges, enabling the inclusion of trust and various types of data as strategic assets within corporate reporting is needed. The Coalition for Inclusive Capitalism and EY are working together on the Embankment Project which brings together a variety of stakeholders with the purpose of creating a long term value framework offering a consistent model for how companies can effectively measure and report the value they create.
A long-term value framework will help companies deliver a broader and more accurate picture of the company’s authentic value to their stakeholders. This also includes investors and wider society, and to improve allocation of capital for the long-term as well as enable stakeholders to make more considered judgment about long-term behaviors and value creation. Consequently, this will bring us one step further in making the world a better working place.