Financial performance is just one component of an organization’s true value — in fact, what’s on the balance sheet is now estimated to be just one-fifth of a business’s value. That’s one of several reasons the CFO’s role in value creation is growing more complex.
The role shift and a greater emphasis on intangible assets are the subjects of a recent report released by the International Federation of Accountants (IFAC), the International Integrated Reporting Council (IIRC), and the Association of International Certified Professional Accountants.
The report, The CFO and Finance Function Role in Value Creation, is timely as it sets forth a value-creation agenda, which is something businesses are struggling with amidst the COVID-19 pandemic.
The report classifies value three ways: balance sheet, business, and societal. These types of value cover an organization’s six types of capital as defined by the IIRC in 2013: natural capital, social and relationship capital, intellectual capital, human capital, manufactured capital, and financial capital.
A supplementary document to the first report, Understanding Value Creation, delves deeper into the facets of creating value for the modern finance function. The reports say that value is:
Defined by customers, investors, and other stakeholders;
Created through the organization’s purpose, strategy, and business model, taking into account all resources, capitals, and relationships in an integrated way;
Delivered to stakeholders through responsible products and services, and through new channels, at an appropriate price;
Sustained by retaining and protecting value internally, and by appropriate reinvestment and distribution to shareholders and wider society.
Value can be defined differently by employers or suppliers then it might be by customers or investors. The reports cite the example of the 2019 annual report of Royal Schiphol Group N.V. The company is based in the Netherlands, where it owns several airports. It also has a share of ownership of airports in Australia and Tasmania and manages the terminal and retail operations of Terminal 4 of New York City’s John F. Kennedy International Airport.
Royal Schiphol Group’s annual report includes an explanation of its value-creation model, starting with inputs (the six capitals) and finishing with outputs, such as return on equity or on-time performance, and outcomes, such as a prosperous business climate or selected items from the UN’s Sustainable Development Goals (SDGs).
“Of the 17 SDGs, six are highly relevant to our activities and our role in the value chain,” the Royal Schiphol Group report said. “We are working to increase our positive impact and reduce our negative impact with regard to each of these six SDGs as part of our ongoing contribution to the future-proof aviation industry.”
Of course, the aviation industry was, like many, blindsided by COVID-19. The introduction to the report by IFAC, the IIRC, and the Association addresses the topic, citing the disruption as yet another reason finance must take a holistic view towards value creation.
“A digital, data-driven, resource-constrained, and post-COVID-19 world presents much uncertainty in which there are enormous opportunity and risk,” the report said. “The CFO and finance function need to help navigate, measure, and communicate what matters to long-term success while dealing with the expectation for short-term resilience and performance.”
By Neil Amato