Public attitudes to big business would potentially be a lot more positive if support for multi-capital business models were as strong in the business and investor communities at large as it was at the recent ICGN-IIRC conference in London.
Digital polling of the conference audience revealed 98% support for the view that business models which consider different capitals, as well as financial capital, can better deliver value. However, putting this into practice is an uphill struggle for companies and there is still little demand from the mainstream investment community for change.
Tim Haywood, group financial director and head of sustainability at support services and construction company Interserve, explained some of the challenges for companies. “We have done our level best to measure things that have not previously been measured; set targets for things that haven’t previously been on the radar; and reported progress against them. Let me tell you it hurt the organisation a lot,” said Haywood.
“There were plaintiff cries of ‘We haven’t got enough resource to find this information out’. It is a difficult balancing act to keep people focused on the big picture of why we are doing this while dragging the organisation through the practicalities of how we are going to do it,” he said.
Digital polling revealed strong support at the conference for the use of the “six capitals” model as a tool for business and investor decision-making. This model aims to measure and provide insights into the value created by intellectual capital, human capital, manufactured capital, social and relationship capital, natural capital and financial capital.
Five years ago, Interserve started off with the idea of maybe having a balance sheet encompassing all of these capitals, but along the way the company realised that it needed to take a more personalised approach. Hayward said: “There don’t necessarily have to be six capitals. Have as many capitals as are relevant. It may be fewer; it may be more.”
Alexsandro Broedel Lopes, group finance director at Brazil’s Itaú Unibanco, agreed that companies do not need to find “a perfect measure”. They just need to know that what they’re measuring is going in the right direction. “Accounting systems are full of judgement—the inputs are very subjective. I don’t think that measuring impairment or goodwill is different from measuring customer satisfaction,” he said. In today’s IFRS (international financial reporting standards), joked Lopes, the only precise number on the balance sheet is the date.
Luka Mucic, chief financial officer at software company SAP, also urged companies to “be bold” rather than worrying about whether the numbers relating to alternative sources of capital are “scientific enough” to show to stakeholders.
One way to gain confidence in the process is to come up with an integrated reporting methodology and have it audited, something that SAP has done. Mucic said: “The company has tried to connect the core metrics on top-line growth and bottom-line performance back to key financial and non-financial value drivers. This is something that we are sharing with debt rating agencies.”
He added: “You cannot infer that a movement in one of those metrics has a direct bottom-line impact—they are not necessarily correlations. But at least it gives transparency around our thinking about those correlations and we can start to have a dialogue that will make the models better.”
Dawn Cowie is a contributing editor to Board Agenda.