How do you tell the truth, the whole truth, about value?

What are the real drivers of value in your business? You know, but do the analysts reporting on your sector? Your regulators? Investors? Employees?

What people do know is that financial reporting, as it stands now, can be open to misinterpretation. And has been. There's a creeping lack of trust.

So how can you tell the whole story about value being created by your business?

Do they miss what's missing?

Creating long-term, sustained value is a result of multiple activities: how a business generates financial value, the actions it takes to lessen its impact on the environment, how it strives to have a positive social impact, the emphasis it gives to sound governance and how it enables its people to innovate and embrace change, to name a few. Measuring the factors that reflect the creation of value will go far beyond the information that regulators want to see.

Financial reporting itself hasn't kept up with the times. There's a huge amount of value that doesn't show in traditional methods like balance sheets and quarterly earnings reports.  

Profit is quick to recognize short term changes in revenues and costs, but what about investments made for the long term? What about innovation, talent, brand and supply chain? They comprise part of a long list of intangible assets that are missing from the balance sheet.

Profit is quick to recognize short term changes in revenues and costs, but what about investments made for the long term?

At the risk of making you yawn, some intangibles do end up on a balance sheet: things like goodwill, patents, intellectual property rights and so on. But many don't.

Think about the millions that consumer product companies and others spend on building their brands and developing a loyal customer base. Think about what motivated employees eager to innovate and embrace technology can achieve in industries undergoing disruption.

These are real assets that give companies a competitive edge. But where do they show in today's financial reporting? It's simple. They don't. On average, 50% of the value of a business rests in intangible assets. Do you remember that ad campaign, “You won't miss what's missing”? This is the opposite: if people don't spot what's missing from your financial reporting - because it's not being asked for - your business could be undervalued and your stock price could suffer.

What leading companies are doing

It's in the nature of intangibles to be unseen – so how do you show the real value and worth of your business?

There are a number of new reporting frameworks under development to try to address this problem. But consensus is far from easy. Different companies, industries and geographies want to report different things. Creating a standardized reporting framework for long-term value will take time.

In the absence of an agreed framework, many companies are using open letters to shareholders and narratives in the annual report to tell their stories.

EY looked at the annual reports of the top 50 Global Fortune 500 companies[1] to analyze if and how they were reporting on value. What we found is encouraging:

• 72% described how they generate value. Some focused on traditional actions such as operational and financial decisions, but others discussed a broader array such as improving competitiveness through collaboration, an innovative culture, maintaining a technological edge, focusing on customers, prioritizing digital and new business models.
• 82% mentioned intangibles as a source of value. Even companies who didn't go into detail about how they were creating value talked about the contribution that intangible assets made to the organization. Most frequently mentioned were employees, innovation, brand, customers, collaborations and networks, governance and minimizing environmental impact.

Answer the questions they're not asking

In discussions with companies around the world, leaders have been telling me some of their investments are not being recognized and, as a result, their businesses are being undervalued or misunderstood. Creating a better framework that recognizes long-term value is not a technical problem for accountants to solve in isolation – it's a real world problem we all need to engage with. 

Creating a better framework that recognizes long-term value is not a technical problem for accountants to solve in isolation – it's a real world problem we all need to engage with. 

On 16 November, EY and the Coalition for Inclusive Capitalism, alongside 30 leading companies, academics and investors, launched its report on how to move beyond quarterly financials and measure the long-term value of talent, innovation, societal impact and governance. This framework is a great step toward enabling a more consistent and transparent view of value drivers for investors and other stakeholders.

At EY, we've also used a broader range of metrics in our 2018 Annual Review, to report on how we attract, develop and retain our people, how we support innovation and diversity, and our impact on the environment and the communities we operate in.

Right now financial reporting only provides a snapshot of a company's value, and a partial snapshot at that. Clearly what's needed is not a higher volume of reporting, or companies cherry picking the best messages and ignoring the rest. I look forward to the development of new frameworks that deliver high quality, reliable and more comparable information on what is really driving value.

[1]   Top 50 (by revenue) of the Global Fortune 500 companies who produce an annual report in English