The majority of a company’s value is now reflected in the intangible aspects of its business, relating to factors such as innovation, culture, trust, human capital, sustainability and governance. These concepts are difficult to measure, and most of them are not captured by traditional accounting and managerial reporting frameworks, but there is a pressing need to do so as shareholders, capital providers and other stakeholders increasingly focus on how companies create long-term value.
The global COVID-19 pandemic has brought even more attention to bear on companies’ societal roles and responsibilities. As Klaus Schwab, Executive Chairman of the World Economic Forum (WEF), pointed out in an article published in the Financial Times on 25 March 2020: “A short-term economic crisis such as the one induced by the coronavirus outbreak reveals which companies truly embodied the stakeholder model, and which only paid lip service to it, while fundamentally maintaining a short-term profit orientation.”
Prior to the pandemic, there had already been a notable shift from shareholder to stakeholder capitalism. In the field of corporate reporting, the Embankment Project for Inclusive Capitalism has worked on developing new metrics and methods that help businesses measure and articulate the value they create for a broad range of stakeholders.
Measuring the next generation of KPIs
So the onus is now on companies to define the next generation of key performance indicators (KPIs): those that provide a more holistic view of their activities and their long-term value drivers. As these new KPIs and reporting frameworks start to emerge, companies have to address how to measure these new indicators, which can be more complex to evaluate than pure financial indicators and ratios.
The good news is that the advent of big data means there is a broad set of unstructured and external information to tap into. The challenge for business leaders is how to do this effectively – which is where artificial intelligence (AI) comes in. AI will be a vital tool in measuring next-generation KPIs and enabling companies to better demonstrate how they create long-term value.
Trust and financial performance
For example, AI is already being used to measure levels of trust – something that is vital to a company’s value. That’s because the way in which someone trusts a company or brand now will affect how they behave toward it in the future. While trust impacts consumers, suppliers and employees, it also impacts the company’s cost of capital insofar as it influences the views of capital providers and the capital markets. While these implications are clear, they are often difficult to report upon or measure directly.
Advanced analytics and AI can be leveraged to gather and aggregate large quantities of data, including data from multiple sources, and produce “trust scores” for a range of metrics such as integrity, consistency and openness. A variety of tools have been developed that address many versions of these so-called trust analytics, based on different attributes and factors. Companies and capital markets alike are increasingly using these tools to analyze market and consumer sentiment and understand the level of trust in a brand or organization. They can help companies to make managerial decisions, by directing them to areas of the business they need to enhance, while analysts and investors can use them to make investment and credit decisions.