Value creation is a key function of every board and adding value is central to the roles of both directors and senior managers, but what do we mean when we refer to value in this way?
The Capitals Coalition is a global collaboration that seeks to redefine value in order to transform decision-making. They recognise that:
“Capital has traditionally been thought of only as money, but capital describes any resource or asset that stores or provides value to people.
Natural capital, social capital, and human capital work in much the same way as traditional capital – if we invest in them they create value, and if we degrade them we limit their value.”
The notion that money is only one of the ways we can think about value is not new for organisations in the non-profit and for-purpose sectors of course. Social value and social impact have informed our strategies and reporting for many years.
Integrated frameworks and standards
The development of an integrated reporting framework that takes into account six kinds of capital is not recent, however, it has some way to go before it could be considered mainstream. This post seeks to encourage more associations and charities to incorporate the framework in their governance activities.
My previous post Measuring Social Value (Impact) drew attention to Principles of Social Value devised by Social Value International to shape international standards on accounting for value. The standards are set out against the application of each Principle, to enable organisations and individuals to effectively measure and manage the social value they create and protect.
The Value Reporting Foundation published the first version of its International Integrated Reporting (IR) Framework in 2013. The current version was published in January 2021 and is now being used to accelerate the adoption of integrated reporting across the world, with an aim to:
- Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies
- Support integrated thinking, decision-making and actions that focus on the creation of value over the short, medium and long term.
- Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
- Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time
The Foundation has also helpfully linked the IR Framework with the UN Sustainable Development Goals.
In their original framework, the six ‘strings’ of capital were each treated as important, although the financial was recognised as the ‘lead’. Their latest version weaves the six strings into a flexible ‘spring’, acknowledging the need to respond positively and sustainably to complexity and uncertainty while optimising value across all capital domains. Given the complexity of the graphic below, you may wish to view their framework online to allow you to see the details it offers.
Technical resources on issues such as materiality and assurance (credibility and trust) in integrated reporting are available here.
Other multi-capital frameworks
While the IR Framework broadens the consideration of value beyond the traditional emphasis on financial measures, it should not necessarily be considered a complete or comprehensive analysis of all forms of value worthy of consideration by your board. If you are a community organisation, for example, you might use a Community Development model such as the one devised by the North Central Centre for Rural Development in Iowa, USA.
A comparison of this framework with the IR Framework, illustrated in the header image above, reveals both common and somewhat different capitals. Other for-purpose organisations may identify additional or different capitals which they would consider essential to their thinking about creating value for their stakeholders.
Elements of multi-capital value
The chart below unpacks each of the capitals offered by the two frameworks mentioned above and offers examples of the many kinds of value we create and preserve in our non-profit and for-purpose work. The interdependencies between these various forms of capital are emphasised in this illustration, which implies the use of the organisational ‘eco-system’ metaphor.
Sustainable value
Sustainability has long been recognised as a broad concept encompassing people, the planet, and profits. Integrating our thinking about these three priority areas has been promoted by organisations advocating a systems approach. The Future-Fit Foundation is one such body, and their free benchmarking service offers principles, goals, indicators, and guides to help you play your part. Their observations about rethinking value creation through a systems lens are summarised in the chart below. This recognises that each of our organisations is simply one element in a nested holarchy, and that we each have a responsibility to address the interdependencies that are involved.
Types of Interdependence – for your analysis
Sociologist James D. Thompson defined three types of (task) interdependence in his seminal book Organisations in Action (1967) as illustrated in the chart below.
While this typology helped directors and managers to think about ways their employees interacted (the human capital within the organisational eco-system), it did not accommodate other interdependencies, such as those offered in the multi-capital frameworks mentioned above.
Each non-profit and for-purpose organisation has its own unique combination of capitals and elements of value. To enhance your value creation efforts, your board and management team may wish to start by identifying the interdependencies and dynamics of interactions between each of those elements.
See also:
3 thoughts on “Creating Value using an integrated (multi-capital) approach”