Corporations are measuring the wrong thing

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A sweeping criticism of the way companies value themselves and report on their performance is set out in a new report published this month by EY, the international accounting and management consultancy firm.

The 39-page Accounting & Reporting for Long-Term Value report says that existing ways of measuring company performance are providing insufficient and sometimes misleading information that is failing to reflect the proper value of modern business corporations.

It calls for a new performance-monitoring framework that takes into account non-price factors including the skills of employees, environmental factors and other intangibles.

“…there is still a significant and increasing disconnect between current reporting and the drivers of long term value,” the report says. “Too often, reporting fails to capture information on intangible assets as drivers of organisational performance.”

The report says that intangibles now account for around 50 per cent of the market value of many organisations. Economics2030 analysis shows that more than 90 per cent of the assets of the 25 most valuable companies listed on the London Stock Exchange were in a non-tangible form at the end of 2015.

The report says companies face four key challenges:

  • Profit and shareholder returns are increasingly disconnected. This is due to the fact that profit is a short-term value indicator, while shareholder returns accrue over the long term.
  • They are often measuring and reporting the wrong things
  • Trust in organisations is diminishing due to their failure to address growing environmental, social and governance (ESG) pressures adequately
  • Regulation has become “overburdensome” and increased information demands reduce reporting clarity.

The report calls for:

  • An alternative reporting framework
  • New approaches to reporting intangibles
  • The publication of strategic reports about long-term prospects, and
  • Integrated reporting of all factors influencing a company’s long-term value.

Economics2030 says the dominance of intangibles as a source of output and employment and in corporate balance sheets demands new thinking including about the right structure for business corporations.

It also argues that attempts to extend the definition of intangible assets that can be booked in corporate balance sheets should be conditioned by a proper evaluation of the impact of the growing dominance of intangible capital in advanced economies.

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