Can a different framework of value enable greater trust in business?
Defining the journey towards more effective measurement and reporting of value
The world is changing at a rapid rate; business is fast becoming enabled with new technology which will mean faster and lower cost delivery of quality services.
This has led to a world of hyper connectivity, characterised by machine learning, autonomous vehicles and business transactions that are verified through the use of blockchain technology. But business is not only facing new technological enablers. Recently, we have seen radical shifts throughout politics and society.
Whilst all this is playing out, it is clear that we will need to invent new regulatory and ethical regimes. Current governance methods are already outdated and is not providing the assurance business and society needs. One of the key changes that we have detected is that intangible drivers make up a much larger percentage of organisational value. The current accounting standards do not support this trend.
It is against this backdrop that we, along with Cambridge University have undertaken an extensive study on how accounting and reporting could look in the 21st Century. Our findings indicate that investors and other stakeholders find little value in the way that companies report today.
We are proposing a long term value (LTV) model as a new way for companies to communicate their long term value-creating potential and are launching a major collaboration of leading academics, businesses leaders and institutional Investors to develop a roadmap for action.
This website provides access to our point of view and an accompanying white paper. These will form the basis of a series of pilots in 2017. We want to emphasise that this is a call to action as well as a potential way forward and we are delighted that so many investors, think-tanks and business leaders are actively engaging on this. In our capacity as a professional services organisation, we will be the catalyst to collaborate in tackling this challenge.
Understanding the challenge
Accounting as we know it has remained broadly unchanged from its conception in the 15th century by Italian mathematician Luca Pacioli.
In 1971, the first accounting standard was issued by the newly formed Accounting Standards Steering Committee. From 1971 to 1979, the principles of modern corporate reporting were established. During this time, manufacturing was at the heart of global economies and in 1975, physical and financially accountable assets were still the primary balance sheet constituents.
However, we are now witnessing the fourth industrial revolution — characterised by hyperconnectivity, data-informed decision-making, and automation — which is disrupting and reshaping entire industries. Additionally, globalisation, externalities such as climate change and calls for inclusive capitalism are leading to new operating challenges and requirements.
In view of the fact that the operating context and the business models organisations use have changed significantly in the last decade, we now need to question whether accounting principles and practices defined 100 years ago are still fit for purpose today.
No framework currently exists for Boards to consistently measure, manage and communicate the value they create across stakeholder groups over the long term and relate this value to investors and other stakeholders in a compelling way.
This plethora of activity is creating confusion at the Board level and is frustrating investors:
- Companies — Multiple CEO-led fora are growing in influence and momentum as they look to build long term value but lack the metrics to operationalise it;
- Investors — mobilising around long term value and capital allocation but currently there are few commonly accepted investment grade metrics;
- Regulators and Accounting Standard Setters — showing interest but slow to respond with new accounting methods and standards;
- Influencing organisations — highly active in driving the call for more comprehensive corporate disclosure but most not addressing the complete picture;
- Professional Services — increasingly prominent around this agenda and positioning with key influencing organisations. There is innovation in measurement frameworks but these tend to have a bias towards sustainability.
These all represent important initiatives in their own right and the leadership shown across stakeholders is encouraging. However, without a unifying language of long term value to bind these stakeholders together there is a risk of further fragmentation and complexity across the investment chain.
Attributes of a new framework
We have held discussions with business leaders, academics, employees and investors, and made significant investment in understanding what attributes of a new reporting framework are required for 21st century companies.
In summary, a new framework must pass the following six tests:
1. The new way of reporting should be clear about context;
2. It must be material to stakeholders;
3. It is critical that the organisation describes its purpose in a meaningful process;
4. To be trusted it must be assured;
5. It should provide a more complete view of value; and
6. It must to simple to understand.
Defining the LTV model
We used the six tests identified to develop and propose a new model for reporting – the long term value (LTV) model. Our intention is to develop an approach to reporting long term value which:
- focuses on identifying and communicating how organisations create value in the long term for all of their material stakeholders;
- aligns this with the organisation’s context and purpose, ensuring that the organisation is both realistic in its aspirations and trustworthy in its communications;
- reduces the regulatory burden of reporting by providing a structure that communicates the essence of the organisation without resorting to massive reports or regulations;
- utilises and provides assurance over new data sources to present a new view of the way the organisation creates value across multiple stakeholders; and
- builds on recent developments (most notably new concepts in reporting intangibles, strategic assets and integrated reporting).