In December 2016, a revision to the Dutch Corporate Governance Code (the Code) placed long-term value creation at the centre of how businesses should report. This marks a significant shift in the way we measure the success of an organisation, looking beyond pure financial gain. To understand why this is now of such importance to reporters, we need to look into what we mean by “value”, and why it matters long term.
The importance of financial value
Financial capital is, of course, the primary source of value created by any business. Without it, a business cannot continue to invest in its long-term future. Annual reports have always, and must continue to, explain how a business makes money and how it plans to continue doing so in the future. But many companies, and reports, fail to recognise that financial success is only possible through the creation of wider value for stakeholders.
So how can we identify the wider value of a business, and how is it created? The starting point has to be a clear definition of its model; What it does, what it creates, and why?
Explaining value creation through the business model
Every business has a value chain. This is where all value, including financial, is generated. Customer satisfaction, employment, community investment and commerce are all integral outcomes of a successful business model, and benefit a wider social or economic environment. For example, the mining of gold provides value beyond the commodity buyer. It ensures electronic products, the advancement of aerospace technologies and drives financial markets. Without this value, gold mining cannot be defined as a sustainable activity for the long-term.
The creation of jobs is another example of wider value, which has a positive impact on the economy and society. Within the value chain, employees get better at their jobs. Whether they stay with one company, or use their skills elsewhere, long-term value is created by a company that enables the development of those skills.
Businesses are notoriously bad at recognising these factors as valuable, which is why the Code has placed such importance on the things that have been historically overlooked. The Code calls into question how we evaluate business success. As such, reporters are now challenged with identifying and communicating the material elements of a business and how these things are managed and controlled. They then need to communicate how this generates long term value.
Looking to the future
The Code calls for a new lens on the way reporters look at value. Financial gain will always need to be measured. However, looking at how long term value is created will help companies allocate resources, build trust with stakeholders – financially and emotively – and become more sustainably successful.
Radley Yeldar is hosting a round table discussion on this subject in The Hague on June 12th. Learn more about the event, and how you can attend here.