Research Reveals Gaps in Reporting and Understanding Value Creation

Posted
28 February, 2018

As society and businesses change at an ever increasing rate, the information that companies need to capture and report is also changing, and existing accounting, information and reporting processes and systems are not up to the task.

A new research report released by the Association of International Certified Professional Accountants[1], Black Sun and IIRC reveals that executives believe that they need better information to deliver future success. Purpose Beyond Profit is based on a global survey of business leaders in 50 countries, and assesses how value creation information is used and understood.

Executives globally report an interest in taking a longer-term strategic perspective and having more insight into drivers of future performance. A large majority of those surveyed, 87%, either use non-financial information in decision making or are actively trying to do so. In addition, 79% agree that a using a longer-term strategic perspective would improve companies’ ability to create value.

Executives see multiple benefits from using both financial and non-financial information to make decisions, with the majority agreeing that it would deliver benefits such as more effectively identifying and managing risk, driving improvements in business decision making and helping to achieve a more forward-looking, longer-term view of performance. However, only 12% reported that they are confident they are capturing the right information about environmental and social outcomes, and only 11% reported that they have successfully integrated non-financial information in decision-making processes.

The good news: a substantial 38% reported that their businesses are working on capturing new types of information and creating new tools to better understand performance.  Companies are taking action to close the gap between the information that is reported and disclosed and the information that is needed both internally and externally.

Highlighting the importance of adopting integrated thinking and reporting, an overwhelming majority of executives surveyed, 83%, believe that adopting <IR> supports business success. Executives believe that integrating different aspects of performance information is useful for decision making both internally and externally.

Other key findings of the Purpose Beyond Profit research include:

  • 93% of executives agree that effectively explaining value creation is important
  • 96% agree that bringing financial and non-financial information together provides a more forward-looking, longer-term view of performance
  • Only 28% report a high level of confidence in the strategic information their businesses disclose (including goals and competencies)
  • Only 24% report a high level of confidence in business model reporting (including types of value created for different stakeholders)
  • Only 24% believe their company’s disclosure does a very good job of meeting external information needs

Survey results also mirror the results of recent investor research, which highlights the need for better disclosure, as opposed to more disclosure. Investors claim that using non-financial information is time consuming and costly because companies disclose not only low-quality information, but significant quantities of immaterial information.

According to a 2017 survey of investors by the CFA Institute, the biggest factors that limit the use of non-financial information include lack of appropriate quantitative environmental, social and governance (ESG) information, lack of comparability over time and questionable data quality. [2]

While executives believe that meeting the needs of investors will continue to be important, the report that meeting the needs of customers and other stakeholders will be significantly more important to business success in the future. As the importance of stakeholders other than customers and investors grows, businesses will need new models of management, measurement and leadership to fulfil their purpose and create value for all stakeholders.

“We have to get better at looking at the bigger picture, where our driver is not profit above all else, as this is an unsustainable business model,” one survey respondent noted.

For long-term success, businesses need to measure the right things, even if doing so is difficult. The development of integrated reporting, and refined approaches to presenting and discussing business models, are important developments in the movement forward to greater clarity and understanding of corporate value creation. It is also necessary to broaden the dimensions of performance that are considered in accounting and reporting systems, as well as the time horizons used.

[1] The Association of International Certified Professional Accountants is the unified voice of the Chartered Institute of Management Accountants and the American Institute of CPAs.
[2]‘Global Perceptions of Environmental, Social and Governance (ESG) Investing’, CFA Institute, 2017.