Long-term value – the next buzzword? (Part 1)

We are increasingly seeing how the role of business and financial institutions is being questioned and are asked to demonstrate a strategy for long-term value creation rather than short term financial performance. Authors: Jolanda Dolente and Mike Sills
Lighthouse on beach, Humberside, England

Society is increasingly demanding that companies serve a social purpose and contribute to the greater good. Corporate social responsibility is no longer seen as a “nice to have” but is gradually becoming a must for companies.

In order to meet this change, it is time to rethink how we account and report on organizational performance as many board members and executives are increasingly being asked to demonstrate how their companies are creating long-term value. Investors are disappointed with how companies are reporting today. Larry Fink, CEO of Blackrock, whose firm manages $6.3 trillion in assets, wrote in a public letter to CEOs of public companies said that simply managing for short-term shareholder profit is no longer an acceptable management strategy. Executives need to increasingly be able to explain how their organizations are creating long term value for all of their material stakeholders in order for them to have meaningful and insightful discussions with investors and equally important, to be able to make the right management decisions. Integrated reporting and the strategic report have made incremental enhancements to the quality and usefulness of reporting, however, there is still a significant and increasing disconnect between current reporting and the drivers of long term value. Reporting frequently fails to capture information on intangible assets as drivers of organizational performance.

The Coalition for Inclusive Capitalism and EY are working together on the Embankment Project, which brings together a variety of stakeholders with the purpose of creating a long-term value framework offering a consistent model for how companies can effectively measure and report the value they create. Whilst a methodology for doing so is currently still being draft, companies can in the meantime get a head start by considering this 3 questions:

  • Do you know what percentage of your market capitalization is based on intangibles? Can you appropriately explain the drivers behind these intangibles to investors?
  • How is the company aligning its strategy and business with long-term value concepts? If it needs to transform to do this, what is its approach?
  • How do you plan to measure the creation of value for your stakeholders? Do you have appropriate information and decision-making tools to optimize your company’s long-term value?