CFOs must be part of the conversation if we are to make integrated reporting the global standard
It’s time for a comprehensive scorecard reflecting the right KPIs, argues Russell Guthrie, CFO of the International Federation of Accountants
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Sustainable value is not a buzzword.
In fact, long-term sustainable value creation—a company’s ability to create, deliver and sustain positive outcomes for investors, of course, but equally for employees, customers, society, and more—has been a top priority for business for several years now. The term “sustainable value,” however, is often overused or misunderstood, and the perspectives around measuring performance and value are fragmented.
Given the new realities amid COVID-19, that has to change. Now is the time for businesses to prove to investors the “S” in ESG, and those that hope to stay relevant have no choice but to reconcile the business’ composite worth beyond just a balance sheet. They must align around comprehensive metrics including:
- The company’s positive net societal impacts and contributions including to the SDGs
- Intangible assets and competitive advantages tied to ESG
- Traditional financial performance, including profitability and returns
This holistic approach comes with immense challenges. There is an urgency to transform ways of working and operating models amid the ongoing public health crisis, which can lead to rushed decision-making that undermines future success. It’s also true that realising positive outputs is impossible without high-value inputs, and many companies are suffering from inadequate data and siloed finance functions. To create long-term value that will stoke a green and just economic recovery during and after COVID-19, chief financial officers must be empowered by their CEOs, boards, and investor base to bridge these information gaps.
Transforming Quickly but Deliberately
COVID-19 has exposed the fine line between a valuable business and real cash. Airbnb saw its business plummet from industry leader to barely viable in just a few weeks as quarantines went into effect. But it also exposed the need to double down and look at long-term value. As Airbnb CEO Brian Chesky recently told Fortune, the company has placed even more emphasis on its mission and people—both levers for long-term value creation. Ultimately, the company saw business begin to resume through more localised travel and even thrive in unexpected ways.
What this Airbnb example illustrates is a reality we’re seeing more and more. Even in this environment of uncertainty and fragility, companies have to be deliberate in their transformation decisions. Moving too quickly or being overly reactionary impedes the implementation of real, lasting solutions that drive value in perpetuity.
Leveraging the Right Measurements to Succeed
One of the most critical elements of meaningful transformation and long-term value creation is data. Measuring – and, in time, monetising – impacts of employees, consumers, reputation, R&D and more at scale is vital. For many companies, however, that information is largely missing or poorly understood. Even more, value is unrecognised in financial statements and reporting. Intangible assets are now responsible for 80% of all business value – but much of this value is not captured in traditional financial statements.
Companies cannot manage what they do not measure, nor can markets allocate capital or price risk. High-quality and integrated information is critical for both internal and external stakeholders.
PwC’s 22nd Annual Global CEO Survey highlighted the huge gap in data adequacy for boards and management, which inhibits even the most well-intentioned attempts at long-term value creation. The gaps exist between data considered critical for decision making and the comprehensiveness of that data. Companies must prioritise making more and better information available to financial teams and decision-makers. Doing so makes it easier to capture relevant value drivers and leads to higher shareholder and multi-stakeholder returns. This includes conventional performance as well as value drivers related to operations and customers; relevant intangibles that drive strategic value such as people, IP and innovation; and, ESG factors that increasingly represent opportunities or risks to value creation. Data-enabled success only works, however, when the CFOs are part of those strategic, long-term sustainability conversations.
Empowering Finance Teams as a Competitive Advantage
Even with the right approach to transformation and adequate data inputs, companies must also bring more integrated thinking to their measurement and reporting. Many of the impacts tied to long-term value creation are not yet directly material to financial performance or market value, but they are critical competitive differentiators. ABN AMRO, a Dutch bank, for example, prepares an integrated profit and loss statement to quantify its impacts from financial and non-financial capitals. And in the real estate investment space, The Crown Estate uses impact measurement and economic valuation to highlight the positive and negative flows that result from its activity and external influences. For these and other use cases to become mainstream, it is imperative that CFOs, with the support of the investment community, shift to a more stakeholder-centric mindset.
For investors and CFOs alike, the move toward global corporate reporting standards that account for both financial and non-financial value is a key part of the equation. After all, delivering shareholder value does not have to be a trade-off with creating value for other stakeholders. In fact, investors will lose out on future returns if they do not begin to recognise the drivers of long-term value today.
Those that make these shifts now and do it right will be canonised for their initiative and emulated by peers. It’s time to implement a comprehensive scorecard reflecting the right KPIs (financial, non-financial and pre-financial). And, it’s time to ensure that CFOs are brought into more conversations in order to make integrated reporting measures the global standard.
Russell Guthrie is the CFO of the International Federation of Accountants (IFAC).