A closer look at value creation

When you google ‘long term value creation’, within 0,56 seconds you get about 278 million hits. Not strange. If you work within the field of corporate reporting or sustainability, it’s likely that you have heard this term before. Maybe you even worked on a so-called value creation model for your company. But what are we talking about? What is, pun intended, the ‘value’ of this concept? More importantly, as a business manager, how can you enable your organization to create value in the wider sense? In this blog I’ll give you the basics.

A bit of theory

A short history lesson. Value creation as a concept comes from Integrated Reporting, which started growing around 2008. During that time, we collectively found out that economic stability can’t really be judged based on financial, backward looking, reporting only.

So, the International Integrated Reporting Council (IIRC, since 2021 part of the Value Reporting Foundation) came up with a holistic reporting framework, particularly for the investor community, asking companies to not only disclose their financial, but also their social and environmental impact, and other aspects like external influences, strategic priorities and the dynamics of the business model. The central concept? Value creation, not only in the form of financial capital, but also manufactured, human, social and relationship, intellectual and natural capital. These represent the resources organizations use to create value, as the image below shows.

Although true Integrated Reports are still mostly seen with the ‘frontrunners’ in sustainable business, according to the 2020 KPMG Survey of Corporate Responsibility Reporting, this number is slowly growing, with 16% of companies reporting integrated in 2020. In his annual letter to S&P 500 CEOs, Larry Fink, CEO of BlackRock, has also been consistently talking about long-term value creation and corporate purpose for many years. He says "Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success".

From talking the talk to walking the walk

We now see many company annual reports which explicitly mention ‘long term value creation’ and how boards and management take this into account, but the underlying aim of integrated reporting is to change corporate behavior through integrated thinking.

Trying to get some clarity on integrated thinking is not so easy. IIRC has recently published a guide that goes into the principles of integrated thinking, which can be found here. Yet, concrete and inspiring examples are missing.

It’s all about thinking

My interpration is as follows. Value creation can be in the economic, social and environmental dimension, and impact in those areas can be positive or negative. There may be trade-offs between value creation with the different capitals. Just think about a company that, in order to remain financially fit, needs to let go of a number of staff. Or an investment decision leading to economic growth, which will go hand in hand with negative environmental impact.

Integrated thinking is about the organizational capacity to understand these interrelations and trade-offs.It thus comes down to dilemmas and how you resolve them, by looking at the issue at hand from a kaleidoscope. That is precisely the benefit of integrated thinking.

To get there, companies need to move beyond the typical sustainability department pushing the sustainability agenda, towards creating a culture of sustainability throughout the organization.