Technology enables Integrated Reporting. Integrated Reporting enables Better Valuation (Part 1 of 2)

There is a clamour of voices demanding the rebooting of capitalism, from academics (such as Michael Porter) and politicians (like Al Gore) to investors (such as CalPERS) and Occupy’s street activists.

integrated reporting


Short-term financial focus is short-sighted and incomplete

The common thread is that today’s model of capitalism overemphasizes short-term financial data and neglects information that gets at the true sources of sustainable value creation — things like innovation, brand equity, customer loyalty, and key stakeholder relationships. Corporate reporting today emphasizes compliance, boilerplate and legalese. As a result, we have a massive glut of filings, press releases, analyst reports and articles focused on financial data. The system has lost sight of the point of reporting: to give companies access to financial capital by communicating their value to investors.

 

Negative impact on valuation

The consequence of the systemic failure of this lopsided model is that companies focus on short-term financial performance — because that is what they believe investors are interested in — to the detriment of long-term value creation. This can have a negative impact because investors compensate for the lack of knowledge about issues central to longer-term value by pricing in a risk premium. This can result in market valuations that do not reflect the fundamental performance or future prospects of the business, leading to a misallocation of capital and reduced visibility for investors, reinforcing the cycle of short-term decision-making. And it is the business that pays the price through more expensive capital, while furthering a flawed model of capitalism.

 

Multi-capital thinking provides a clearer picture of value

Fortunately, there is a better way to communicate about the sources of value creation: integrated reporting. Such reporting integrates material information about a firm’s financial performance with information on sustainability performance and intangibles such as intellectual and human capital. In my next post I’ll elaborate on the 6 capitals of integrated reporting, its adoption, and the impact of technology.

 

Read next post on Integrated Reporting 

 

Integrated Reporting Event - Progressive CFO

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