Traditionally the meaning of ‘value’ has been associated with the present value of expected future cash flows. Integrated reporting , however, is based on the understanding that future cash flows are dependent on a wider range of capitals and relationships than those directly associated with changes in financial capital.
"Value" for IR encompasses other forms of value that the organisation creates through the increase, decrease or transformation of the capitals. Each of these will ultimately affect financial returns. It is not the purpose of an integrated report to measure the value of an organisation or of its capitals, but rather to provide the information that enables report users to assess the ability of the organisation to create value over time.
The value-creation process
IR combines an emphasis on conciseness and future orientation with a strong focus on strategy, the business model and value-creation. It is an organisation’s business model which is the driving force for value-creation. However, the business model does not exist in isolation; it operates as part of a system together with the organisation’s mission, its vision and its governance structure.
The organisation’s strategy identifies how it intends to maximise opportunities and mitigate or manage the risks identified in the external environment. Continuous review of all these elements, together with internal measures such as performance measurement, results in a system that is not static. IR aims to provide the information required for business decision-making on all the elements of this value-creation process.
This includes, crucially, the interactions, connections and trade-offs that occur between each element and each of the capitals over the short, medium and long term.
IR makes transparent the connectivity of information and the interdependencies between the various forms of capital and, in so doing, enables a more efficient and productive allocation of capital, both between businesses and within businesses.
Defining value for the business
Defining value involves identifying the unique value proposition of the business, linking this unique value proposition with its customers and other stakeholders and designing, developing and refining a business model fit to serve its customers and other stakeholders. The purpose of the business defines what it is in business for and focuses on its core capabilities, which must be aligned to its business model.
Not all customers and stakeholders are equal. Some will best be served by competitors, for example.
So, the business must rank and prioritise to clearly identify its primary customer and key stakeholders, which must include its employees.
Creating value depends on the capability and infrastructure of the firm. It usually involves motivating and mobilising partners identified when defining value, and locating and accessing resources, markets and technologies needed by the business for creating its unique customer value proposition. To convert these inputs into outputs, the business must design, develop and deploy processes, initiatives and activities that provide the infrastructure to convert partner inputs and the business’s resources into goods and services.
The resources available to any business are the six capitals. A combination of some or all of these capitals is always required to generate value. An organisation’s strategy describes how a business plans to deliver value over time and its business model is its mechanism for executing its strategy.
In developing plans to implement strategy, HR and finance must clearly define what will be required by human capital in the implementation of the business’s strategy. This includes the formulation of people initiatives, people process refinements and analysing ongoing people activities to deliver the business outcomes targeted. This is the people plan or strategy.
Businesses are good, or getting better, at thinking about and measuring the value of the ‘other capitals’, described in Figure 2, in an integrated way but deal with human capital separately. If the planning and management of human capital is detached from the processes, initiatives and ongoing activities of the rest of a business, it becomes difficult to gain an understanding of the value contribution of human capital as part of an integrated whole. It is vital that organisations appreciate the value generated by human capital as well as that of the other five capitals. This is where Valuing your Talent can help.