Value creation needs a new narrative, weaving together both financial and non-financial considerations
Forty years ago, investor analysis rarely needed to go beyond the financials. Over four-fifths of a business’s market value was its tangible assets.
Today, the reverse is true. Tangible assets now represent less than one-fifth of the value of S&P 500 companies, according to research by Ocean Tomo, an intellectual property merchant bank. Companies must tell a more complete story or risk short-changing their investors and undermining their own reputations.
Integrated reporting – weaving together both financial and non-financial considerations in long-term value creation – helps to tell that story. But beyond one or two jurisdictions that mandate it, the practice remains outside the mainstream. In the UK, for instance, Deloitte found that just 7 percent of FTSE 100 businesses make an explicit reference to the framework established by the International Integrated Reporting Council (IIRC).
Companies and their bosses are increasingly expected to explain not just what they do but also how they do it – and why. Two-thirds of investors and three-quarters of CEOs surveyed by PwC in 2016 said they defined business success by more than financial profit. So why is integrated reporting not ubiquitous?
The answer involves a reality check: corporate reporting is already tortuous. The bigger the company – global businesses operating across multiple jurisdictions for instance – the harder it becomes. As it is, companies must run the gauntlet of legislative requirements, regulatory codes, voluntary frameworks and best practice guidelines just to meet minimum expectations.
In addition, many businesses tell us that investors are simply not demanding integrated reporting. Worse, many investors mistrust alternative (non-GAAP) performance measurements – as many as 40 percent according to Deloitte research.
Despite these obstacles, it seems equally clear that integrated reporting isn’t going away. Far from it. Although relatively few businesses formally recognize IIRC’s framework, Deloitte’s research found that over half of businesses reviewed were explicitly using aspects of it. Nearly two-thirds used both financial and non-financial key performance indicators.