The game of business in the 21st century is no longer won by the financial reports after the game. That was the game of the 20th century. The game has changed and what drives business success today is value creation in the minds and hearts of stakeholders. The problem is most businesses are not equipped to measure what drives value creation for their stakeholders.
According to Larry Ackerman, the father of identity based management, “The most powerful cultures spring naturally from the identity of the organization – the value-creating core of the enterprise.” There is a direct link between “value-creating” cultures and organizational success. Great Place to Work has studied the link between value creating cultures and performance for 25 years and publishes their annual “Best Companies to Work For Reports” Analysts show that the financial performance of publicly traded companies on our 100 Best Company List consistently outperform major stock indices by 300% and have half the voluntary turnover rates of their competitors.
So How Do You Measure Value Creation?
Culture is an intangible asset of strategic significance. Mary Adams, CEO of Smarter Companies and author of Intangible Capital says that culture is an element of the organizations strategic capital. Strategic capital includes how an organization combines its resources to solve problems and give purpose. It may also include the business model and other strategically relevant elements of the organization. Every organization has five key assets that are constantly interacting internally and externally together as a system. These assets include:
- Human Capital
- Structural Capital
- Relationship Capital
- Strategic Capital
- Tangible Capital.
It is the interactions of these five assets that create or diminish an organizations ability to create value. Yet our accounting systems only measure 20%, the tangible assets, while the 80% go unmeasured and unreported. Care to guess were most of the value creation comes from? If you guessed the 80% you are right. Ironically 80% of the value in the S&P 500 Index is attributed to the intangibles.
In a recent article in The Guardian Allen White states: The backward-looking and myopic focus of financial reporting provides inadequate insight into the mind, business model and strategy of the organization. It fails to capture long-term opportunities and risks in a world in which knowledge, technology and supply chains are increasingly borderless. Further, financial reporting’s short-term focus and omission of intangible assets that underlie some 75% of market value beg for remedy.
As integrated reporting emerges in the coming years, integrated ratings will benefit from a new generation of information ready to populate a new generation of ratings methodologies.
This evolution cannot materialize too soon. A transformation of ratings can play a vital role in creating the “new operating system” for capitalism that Peter Bakker, president of the World Business Council on Sustainable Development, advocates:
“The mistake currently lies in only expecting (and managing) a return on financial capital. Capitalism requires a new operating system and needs to be rebooted so that we expect and manage the return on financial, natural and social capital. … Business as usual is not an option for a future-proofed economy in which nine billion people live well with the limits of the planet by mid-century.”
Companies, investors and society at large stand to benefit from such a sea change. It is a future the ratings community should not only anticipate, but champion as well.
The future is here. Organizations can indeed identify, visualize and measure the intangibles that drive value creation. Instead of accounting it is called icounting meaning accounting for your intangible capital. You can see the icounting tools here. Welcome to the value creation measures of the 21st century.