29 Oct 2013
Two innovative approaches promise more information, better decisions and ‘good growth’. Total Impact Measurement and Management and Integrated Reporting are opportunities not to be missed, say Malcolm Preston and Mark O’Sullivan.
Your paper for the United Nations talks about redefining growth – that’s quite a broad suggestion; what do you mean by that exactly?
MP: I think it’s fair to say that there’s a lot of upheaval, globally – it’s not just confined to the west or to western markets. The population is growing, but mostly in the developing world – and improved technology and communications mean that more people are seeking a better lifestyle because it’s within their reach in a way it never used to be. But that better lifestyle has to come from a dwindling pool of resources. The business environment is so much more demanding now – you’re more interconnected with other businesses, you can reach more customers, everything’s just so much faster.
But it’s not just more difficult because of the different demands from customers or on resources - take the social unrest of the past few years for example. The financial crisis has really thrown into sharp relief the parts of society that aren’t benefiting from business and economic success. There’s clearly still a gap, and one that people are perhaps more aware of than they used to be. And the upshot of that gap, and of the changes to business, means that a great many people are looking beyond today’s narrow ideas of input, output and profit and towards something that’s more inclusive and lasting – and that’s what we’re calling ‘good growth’.
We’ve been discussing ways to help clients and stakeholders manage goals and track their performance against set objectives – and we’ve brought it all together in something that we’ve called Total Impact Measurement and Management (TIMM). It’s exciting stuff.
Good growth sounds like a ‘nice-to-have’ – what are the benefits to business?
MP: As I said, TIMM is designed to look beyond just inputs and outputs. It enables management to develop a better understanding of the social, fiscal, environmental and economic impacts of their activities. This is interesting in itself and it helps support their licence to operate. But the real benefit to business is decision-making. TIMM gives management the ability to compare strategies and make business decisions, such as investment choices using quantified data, and evaluate the total impact of each decision and choice they make.
Being able to measure, understand and compare the trade-offs between different options means that decisions are being made with more complete knowledge of the impact they’ll have and a better understanding of which stakeholders will be affected by which decisions and how. It’s about saying, “yes, I can deliver sustainable shareholder value, these are the returns I expect, here are the impacts I have and this is the data I used to come to my conclusions”.
There’s a lot of talk about business and trust – do you expect TIMM to help repair some of the damage done to public trust over the last five or so years?
MP: Undoubtedly. TIMM isn’t a reporting tool but it will certainly provide the data, so companies will be able to disclose information - if they want to - that maybe they didn’t have before, or were scared of sharing, in a holistic way.
They can show people, for example, what taxes they’re paying, where, what impact that strategy is having, how it’s contributing to economic growth and so on.
And they’ll be able to quantify what that impact has meant in the past, as well as use the metrics to inform future strategy. There’ll be far more context, less concern around misinterpretation of numbers – especially because the monetisation aspect of TIMM will allow comparison across impacts, options and time. The TIMM approach will really address complexity and uncertainty in a consistent and comparable way, which, if companies want to share the information more widely, is great news for investors, the capital markets and the public.
Malcolm mentioned that information can be interpreted in a ‘holistic’ context; Integrated Reporting has pretty similar aims – balancing financial reporting with social and environmental impacts; are the two initiatives in competition?
MO’S: Absolutely not. They both talk about the same principles, but that’s not because they’re trying to do the same thing. TIMM is looking at how you actually generate relevant and reliable information and integrated reporting (IR) is primarily about how you communicate that information – some of it not part of the traditional information set - clearly.
IR is a principles-based framework to help organisations communicate value creation over time – something investors desperately want. But it doesn’t provide insights into how a company might go about developing such a picture of their business.
TIMM can help a company build up an internal picture and begin to make better decisions – you know, ‘we need to alter our business model because of x, y, z’. IR is the way of making sense of the information you get internally from TIMM – and it’s definitely the way to go public with that information, should you choose to. It’s one thing having pretty much all the information you want, but in terms of reporting, you have to present it in a, meaningful, integrated way, otherwise you risk just flooding the place with data. Both approaches require a lot more information – there are some serious practical challenges there, not least around assurance. What do you think the solution here is? MO’S: You’re right – making judgements about qualitative information is very difficult. Hopefully the monetisation aspect of TIMM will help to address the grey areas – the Total Impact approach provides the information for you to pump into the integrated report, if you like.
As for assuring the information that the TIMM process produces, yes, there needs to be some careful thought given to that. I think asking the right questions about assurance will trigger some really interesting conversations about materiality. If you don’t need to assure it, or you can’t assure it, should it be in the annual report?
It may be that the solution is quite different to anything we have right now – for example, we might decide that providing an opinion on the whole company report isn’t the answer. From my perspective, it’s more about understanding what information is most material to management and the user and then working with them to determine what level of assurance they require. That’s probably going to result in new forms of assurance, and as a profession we need to be braver and more open-minded about that.
MP: People are already thinking about the demands for relevant assurance. The Institute of Chartered Accountants of England and Wales has released a paper about what assurance should look like now that narrative reporting is being mandated in some places. They’re talking about what kind of innovation’s going to be required to assure forward-looking information too.
A key point in their report is that we need to assure the process used to generate predictions and not necessarily the predictions or intangibles themselves. So in a sense, TIMM addresses part of that concern, but we need to have a debate about how assurance works with that ‘total impact’ perspective. We’re going to have to be pretty innovative about it, but if we get it right the ability of management and the board to make well-informed decisions and market confidence in business will be transformed.