It’s no secret that business success in today’s world is reliant on far more than maintaining a strong balance sheet. Companies must set out their long-term strategic roadmap, or otherwise risk losing confidence in their businesses, as publically called for in Larry Fink’s recent annual letters to CEOs.
This high-profile call for change is indicative that thinking beyond short-term returns is something the C-suite can no longer ignore. Increasing demands from wider stakeholders also means the corporate world must deliver different types of value, not just short-term returns to investors. Despite these challenges, the good news is that most are aware of the shift which needs to happen.
Purpose Beyond Profit is a research report conducted by the Association of International Certified Professional Accountants, the International Integrated Reporting Council (IIRC) and Black Sun Plc. Surveyors gathered responses from over 400 C-suite executives from over 50 countries on the trends and challenges associated with measuring, disclosing and understanding how organizations create value. The findings provide some fascinating insights into what executives are thinking on the subject of purpose and creating value.
Current reporting systems are not up to scratch
Only 12% of executives surveyed are confident that their organizations accurately capture the environmental and social impacts of their business activities. Responses showed significant gaps regarding collecting ‘quality information’ on strategy, the business model and non-financial performance, which are all types of disclosures considered valuable for a true understanding of future performance.
Only a quarter of respondents believe that their external reporting does a very good job of meeting the information needs of their investors and other stakeholders. When compared to other recent investor surveys, the findings add up. Many investors, who still rely on annual reports, have expressed dissatisfaction over corporate reporting, revealing that the information they receive is generally inadequate to assess future value creation potential and that a broader range of disclosures is required.
Longer time horizons needed
A substantial majority of respondents, 79%, agree that using a longer-term perspective on strategic planning would improve value creation potential. The traditional system of ensuring short-term results and quarterly reporting is outdated and unsuitable for internal needs as well as external.
The research found that although a third of executives currently use a strategic planning time horizon of over three years, 60% would like to go further than this. 79% also agree that longer-term strategic planning would improve company performance and value creation potential. This consensus is backed up by research from the McKinsey Global Institute which has demonstrated that companies with longer-term strategic approach generally outperform their peers who think shorter-term. Not only did their revenue grow more, it did so in a less volatile manner.
Stakeholder focus must develop
The results also revealed that widespread agreement among executives feel that their organizations need to develop their focus on creating value for wider audiences. Whilst investor returns and customer satisfaction will always be high on the agenda, there is growing recognition around the importance of satisfying other stakeholders’ needs.
For example, less than a third of executives see supplier relationships as of extreme importance at present. However, this goes up to nearly half where future business success is concerned. Similarly, 71% see inspiring and engaging employees as critical in the future when only half do in today’s current environment. These stakeholder audiences provide corporates with a range of resources – both tangible and intangible. Reputation and the license to operate can be just as vital to business success as manufactured and financial capital. By adopting stakeholder-based measures, companies can stay ahead of the trend and adapt their approach accordingly.
Executives back Integrated Reporting
With investors calling for clearer reporting on business models, strategy and growth plans, and executives broadly agreeing that a more holistic and longer-term view of business is needed, it is clear that a new approach to reporting is required.
When questioned on its benefits, executives were in strong agreement on the benefits of the IIRC’s Integrated Reporting (<IR>) Framework, with 83% saying they believe it would help their organizations succeed. Similar numbers of respondents said that the <IR> Framework, complemented by integrated thinking, would help improve the relevance of information given to investors and provide a more complete, forward-looking picture of the range of factors that impact value creation.
By adopting integrated thinking and externally reporting in this enhanced way, companies will be in a better position to internally realise how all tangible and intangible factors impact their business. In turn, enabling more effective, long-term decision-making which supports sustainable value creation.
Key takeaways from the research
The information that companies need to capture and communicate is changing. Accounting systems which were suitable previously are now outdated and need to evolve to realise matters that go beyond the balance sheet, even if it is complex. Companies also need to shift their thinking, plan and make decisions with longer-term time horizons in mind. Positive efforts are being made to address challenges. A number of respondents highlighted that their organizations were developing their accounting and reporting practices, and the debate goes on across accounting firms and regulators across the world.
Top 10 considerations for executives around the value creation story
- Express a clear statement of purpose, ensuring you have a clear understanding of your company’s role in society and consider how stakeholders are engaged.
- Ensure your stakeholders understand your business model and how it creates long-term value, demonstrating value created beyond purely financial measures.
- Provide context to the circumstances in which the company is operating and the market conditions and trends that may impact the long-term future of your company.
- Highlight your competitive advantage and resources that enable the company to execute its strategy, win in the marketplace and create value.
- Disclose strategic goals that are tied to value creation.
- Explain you’re your execution and roadmap for long-term value creation.
- Provide both medium and long term metrics and targets that indicate the company’s ability to deliver on strategy and demonstrate how your strategy has been designed with consideration of your key stakeholder groups.
- Explain how capital and non-capital investments, with a mix of resource allocation will yield sustainable competitive advantage and long-term value.
- Provide an overview of key risks and how executive remuneration is tied to long term value creation.
- Make a clear link to your company’s values and explain how the board provides oversight and embeds a positive culture throughout your company.
For more information, or to get a copy of the Purpose Beyond Profit: The Value of Value – Board-level Insights report, please find the full research on the Black Sun Plc website.