Accounting Standards » An integrated view of performance and value

An integrated view of performance and value

AICPA & CIMA’s Associate Technical Director Peter Spence explains how finance leaders need to develop a deeper understanding of long-term value creation, and how they can facilitate it

Truly great companies can adapt themselves to new circumstances and consistently generate wealth and returns for their shareholders. This sustained high performance is the foundation on which successful economies are built, and it rests on the creation of long-term value.

Building this type of organisation requires finance professionals to develop a wider understanding of value creation than just the information contained in financial statements, although that remains a key part of it. Finance leaders should become much more familiar with the concepts which drive long term value creation, from a range of perspectives.

A comprehensive and integrated corporate performance measurement and reporting system will incorporate three understandings, or perspectives, of value:

  • The traditional accounting perspective

This is about the current value of the organisation. It is derived from capital employed and provided, and you find it represented in the financial statements. This perspective deals with financial and manufactured capital.

  • The investor’s perspective

This is concerned with the future value the organisation is expected to generate. It is derived from strategic and intangible assets that generate future growth and provide the basis for residual income, sustainable earnings and valuations. This perspective accounts for human and intellectual capital.

  • The societal perspective

Societal value is the future value of the organisation. It incorporates natural and relationship capital. This means it captures the positive and negative impacts of an organisation’s activities on customers, employees, society, and the environment. It includes the external impacts which can be quantified and monetized but are not yet reflected in the cash flows of the company, but represent future opportunities and risks.

It is a mistake to think the societal perspective is not linked to investor value and shareholder returns. Remember that relevant non-financial impacts will at some point in the future affect cash flows and financial performance. As a result, these non-financial factors will be priced by investors and capital markets, and are therefore very much a key part of creating long-term value.

This is the reason that a successful ESG strategy is not a ‘nice to have’ extra for a business. Without one, the organisation cannot be said to be optimised for creating value now and into the long term, because the strategy does not comprehensively account for all three perspectives.

Executing this comprehensive value creation strategy means you need a mixture of measures and indicators to capture all three perspectives and the value drivers which relate to them. The key point is that you cannot just track the proprietary gains and losses of the business.

You need to understand the impact its activities have on customers, employees, communities and the environment as well. The goal is to connect strategy, the business model, key value drivers and financial performance. Developing these connections means the finance team should put a great deal of emphasis on selecting the right metrics and KPIs for the organisation.

It helps to begin by identifying the key capitals employed by the organisation as inputs and dependencies. These are what drive performance and value, and they will incorporate the three perspectives I have outlined. From these you can find the KPIs which are relevant to business and stakeholder objectives.

The finance team should use its experience to make sure that KPIs incorporate both leading and lagging indicators, are manageable in number and properly capture objectives and desired outcomes. Once they have been selected, they need to be incorporated into planning and forecasting, risk management and investment appraisal, and wider decision making right across the organsiation.

This process obviously requires a significant amount of work, but done properly it will mean that your organisation will be able to take real value-creating decisions with a good degree of confidence. An added benefit comes from aligning your internal management information with what you communicate externally.

That means your investors and other stakeholders will have a better understanding of how the organisation is creating value, which in turn gives the organisation more scope for long term decision making and strategy execution. Seen this way, the benefits of optimizing the finance team for long term, multi capital value creation are clear.

The task is not easy, but the potential rewards in terms of performance and return make it highly worthwhile.






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