Traditional business management, based on financial analysis, has not kept pace with the seismic shifts taking place over the last thirty years. The value of intangible assets has now grown to over 84% of total market value for S&P 500 companies, according to analyst Ocean Tomo. Yet we persist in running our businesses on the tools that drive financial performance, almost to the exclusion of the real value drivers in a business. Jyoti Banerjee asks what can be done to reshape how we do business today.
Over 40 years ago, our financial balance sheets and profit statements represented over 80% of the value of a business. Unsurprisingly, all the attention was on financial capital; where it came from, what happened to that capital through the activities of the business, and what financial outcomes could we focus on. Today, such a focus on financial capital only explains around a sixth of the value of America’s top companies – yet our tools have hardly changed. We still use financial tools, financial decisions and financial incentives, even when the real drivers of value today are ideas, relationships and human capital.
We find it easy to produce detailed spreadsheets on the return we have generated on capital (by which we definitely mean financial capital), but find ourselves unable to even comprehend a question such as what was the return we got from our relationships. We instinctively know that bad relationships are bad for business, just as good ones allow us to do well. But when is a relationship bad? What makes one good? Which of our relationships need attention, where the “return on relationship capital” is not meeting our internal rate of return targets? And what about the return on human capital, or social capital? Perhaps, we should forget about the return on natural capital – wherever business touches our planet, the answer always seems to be a minus number.
Integrated reporting encouraged businesses to report their activities and impacts across multiple capitals. But the best reporters find that telling their story is a lot easier than doing it. The biggest challenge is that our business landscape is overwhelmingly about financial capital. The tools we use to run our businesses, the tools we learn in business school, and then hand on to our new recruits, all come from an early 20th century view of maximising the return on financial capital.
What we need are new tools, new models for how business works in the 21st century. Rather than using a narrow focus on financial tools, today’s best performers are basing their business decisions on interconnected information across multiple capitals, including natural, relationship, human, manufactured and intellectual. This practice then leads them to ask:
· What are the strategic imperatives behind multi-capital value creation?
· What multi-capital decision tools are credible in the boardroom and with investors?
· How do we deal strategically with their interaction with governance and performance management?
Integrated thinking – balancing a company’s performance across financial, social, human and natural capitals – though fast growing, is still developing as a nascent discipline. Companies are adopting these ideas, but in disconnected ways. We recognize the need for momentum in this critical area and have formed a group of strategic thought leaders to drive progress.
I now co-lead (with Christian Heller of BASF) the Integrated Thinking and Strategy Group, part of the <IR> Network run by the International Integrated Reporting Council (IIRC), which brings together some of the world’s most innovative companies so that they can collaborate, learn from each other, challenge each other’s thinking, and share leading practices for themselves, and those who follow them and we want you to join us.
Through face-to-face and virtual meetings we aim to collaborate and innovate to drive change. The <IR> Framework, which has redefined corporate reporting, was the outcome of just such a collaboration and co-creative act across 109 companies and 35 investors.
Help shape the creation of 21st century business tools and practices through participation in this initiative. Our collaborative process brings together the best perspectives and examples among participants on their current practices with regard to integrated thinking and strategy. Already, over 35 companies from across the world are collaborating on this work, and a US chapter is now being opened (with support from EY) to continue the conversation and focus on US market trends and challenges. It’s a chance to:
I am really pleased that we have support for this work from The Prince’s Accounting for Sustainability (A4S) Initiative, The World Bank, Saïd Business School – University of Oxford, the Natural Capital Coalition and AICPA-CIMA.