Since the financial crisis there has been renewed focus on ensuring business decisions are made with the future in mind, and reflecting the need to create value into the short, medium and long term.
Long-term value creation is understandably hard to quantify, given that predicting financial performance is an uncertain exercise. Retaining the ability to stay profitable in the long term requires resilience against a wealth of unknowns - economic, political, social, and environmental factors, all of which can damage financial performance in unforeseen ways. Considering the last year, developments in the slowing Chinese economy, consistently low oil prices and even the Ebola crisis have all raised many challenges for companies which may not have been anticipated.
The key to demonstrating how a company can generate value sustainably despite such unknowns is considering the bigger picture of the word ‘value’. Whilst it may not be possible to reliably predict profits in 20 years, what can be predicted is that a company will have built the framework to be able to perform effectively - such as through investing in assets, people or IP.
Integrated Reporting, or <IR>, describes six capitals which reflect the whole spectrum of value creation:
By considering how value is created in each of these areas in a business model, a company can start to build up a picture of long-term sustainable value creation. This also enables a broader perspective on generating value, for example balancing the short-term financial hit required to make major infrastructure investments with the long-term financial return. Understanding the value of manufactured, human or intellectual capital leads to a richer understanding of the value a company is creating, even if the financials do not necessarily reflect this in the present.
In sum, taking a broader view of value creation to include non-financial measures not only helps substantiate claims towards the sustainability of a business, but helps give a fuller picture of the benefits of the necessary short-term trade offs that are sometimes required to build a business that is stronger for the future. The <IR> six capitals model is a very useful tool to map the different ways that value is being created in the short, medium and long term, however all business models would benefit from reflection upon non-financial value generation. The perception of the viability of a company into the future may well depend on it - and this, in corporate communications, is invaluable.