Connecting two emerging corporate value creation concepts – Shared value & integrated reporting

In recent times two concepts are gaining more attention from companies who are looking at new ways to both think about and account for their direction and purpose beyond profit says Paul Davies, Principal of  sustainability performance company, Banarra.

In recent times two concepts are gaining more attention from companies who are looking at new ways to both think about and account for their direction and purpose beyond profit.  

The first is a value creation concept that was put forward by Porter in the 90s, and which has gained much traction since an infamous Harvard Business Review article, called Shared Value.  The second is a value-accountability tool that is still being finalised and due out at the showroom in December this year – Integrated Reporting.

Apart from the central theme of value creation, the other main thing they have in common is a high degree of hype and misunderstanding in the marketplace about their purpose and promise.

Shared value, at its heart, is about companies looking to build value not just for their business but for broader society as well. It’s more strategic than traditional philanthropy and more outcome-focussed than many current community investment approaches.  It looks to identify how the business can align and leverage its core strengths, its expertise and its resources to solve social problems in a way that not only makes a difference, but also makes sense for the business – the now well-worn and almost embarrassingly clichéd phrase “win-win” inevitably springs to mind. But it is more than that.

To make it happen effectively the shared value concept relies on a number of necessary business capabilities (some of which may be in short supply). Firstly a willingness to solve real social issues, rather than just throw money at them, must be on the business agenda. It needs original thinking in the business to ask good questions and propose novel solutions to a particular social concern or specific community challenge. It needs engagement across the business to assess its full suite of capabilities and resources and apply them in a coherent way to tackle the social issue.

And it needs a way to evaluate success that really measures change and improvement, not dollars invested or number of volunteers. Social return on investment is still a novel and challenging concept for many businesses as it seeks to measure outcomes rather than inputs/outputs. Outcomes are what value creation is predicated on, and trying to measure value created in any other way is, at best, elusive, or at worst, delusional.

Accounting for value creation sits at the heart of the other related concept, integrated reporting. Integrated reporting is about accounting for value changes within a business over the course of a set period, typically a financial or calendar year.  At the start of the period the business ascribes value(s) to its key assets (called capitals) that it uses and affects. The business’ management model is the means through which it (hopefully) adds value to those capitals in the short, medium and long term. This creation (or in some cases, destruction) of value depends on how the business senses, understands and responds to a range of internal and external factors. These factors are disclosed in their integrated report.

But the integrated reporting and shared value concepts don’t overlap completely.  Not all value created by a company will necessarily be shared value. Shared value exists at the point that someone or something other than the business benefits from the value created by the business. Measuring value change within the business is challenging enough; measuring value change outside the business will be even more challenging. 

There are a number of questions that still need to be addressed by both value concepts. For example, shared value could be construed to suggest that businesses should only contribute to solving social issues where there is value to be had for the business.  There are certain to be a whole bunch of social issues that intrinsically need addressing but may not fit the shared value model – does that make them less likely to be resolved by businesses (who, in lieu of governments, are often the only institutions capable of resolving them)? Is there a fundamental self-centredness at the core of the shared value concept (the ‘what’s in it for me?’ idea) that mean’s certain social issues will not be worth considering by business, no matter how morally or intuitively wrong they are?

Integrated reporting also has some questions hanging over it.  Even if an organisation can identify and quantify changes in the value of its assets (capitals) over time, how does it know that its strategic or tactical management of those capitals has in fact enhanced or influenced their value?  Companies can just have a “good” year, where they’ve benefited from factors they’ve neither influenced nor controlled (eg. climatic stability, social trends, political change, economic upturn). But are they likely to admit that in their report? On the other hand “bad” years can be much more easily ascribed to factors “beyond our control”. It will be difficult to assure the legitimacy of such claims made in integrated reports, at least until auditing and assurance systems transform well beyond where they are now.

Both concepts, however, do have their place in transforming business thinking and accountability. There seems little doubt that adopting shared value encourages businesses to think again about how they can better interact with, and affect changes in, social outcomes. Philanthropy still has its place, but more sophisticated and demonstrably effective approaches to business social investment are not only needed, but expected by shareholders and the broader community. Yet shared value is not just limited to an extension of community investment.  It is about creating new social value through a new product, or reaching a new market, or innovating in the value chain.

Integrated reporting too will surely find its place as, if done properly, offers investors and advisers a much more complete picture a company’s overarching strategy, governance, risk management, performance and longer term prospects. It responds to the one dimensional, short term, backward looking information that plagues annual reports and limits good decision-making. Another benefit of applying shared value to the concept of integrated reporting is that, as noted by the Shared Value Initiative, ‘investors can gain insight into companies’ future growth and profit potential by understanding how shared value strategies address social issues that directly impact performance’.

Both concepts should not be considered in isolation, but as part of a larger picture of businesses as change agents and value repositories.   Shared value offers new avenues for businesses to explore as social game changers, and integrated reporting enables business outcomes to be seen through a value ‘lens’ that is more readily accessible and meaningful than staring at a bunch of figures in a financial statement. 

About the Author:

Paul Davies is a Principal at Banarra and has worked on numerous reporting, materiality, stakeholder engagement, strategy, community standards and assurance assignments in the property, telecommunications, financial, mining, energy, legal and service sectors.

Davies is a certified GRI trainer, a member of the GRI G4 working group on management approach disclosures and a member of the GRI G4 Practitioner's Network.