Complexity and Knowledge Management Navigators…
Organisations have been trying to express value in more than just tangible terms for years. From a Knowledge Management perspective the Skandia Intellectual Capital Model is probably the most well known attempt to bring the value of knowledge resources to the balance sheet. However, in talking with KMers the general impression has been one of smoke and mirrors, something contrived, something lacking transparency and credibility. Now though, something new is in the air…
We have known for a long time that traditional accounting processes just don’t do enough to value the whole organisation. We know that services are far surpassing production as the value creating mode for the majority of countries around the world. We know that even at the heart of production lies innovation. We know that enterprise, and societal competitive advantage is driven by knowledge. Not just in the design and delivery of products/services, but in day-to-day problem solving and decision-making processes (especially considering results and impact). We know that to mitigate the impact of complexity upon an organisaiton that there is a need for devolution and the empowerment of front-line personnel, the sensory receptors that enable fast reactions to the changing environment. We also know that the ability to network and collaborate is a vital component in becoming resilient against the effects of complexity. We come up with lovely labels to describe these needs, such as ‘structural capital’, ‘social capital’ and ‘alliance capital’.
The reality though is that we seem to have lacked an essential component, the endorsement of the accounting profession. Without this endorsement I would argue that knowledge managers (and HR managers) the world over have often struggled to justify investment in projects that aim to develop the organisation’s knowledge resources. Traditional methods have applied rational, reductionist thinking to an environment where complexity makes this type of approach problematic, throwing us into the realms of probability (something I discussed in a previous blog).
Today’s financial accounting standards are outdated. They emerged after the 1929 US stock market crash, in an era when ecosystems and natural resources were in abundance and manufactured and human capitals limited. Today the opposite is true, and natural capital needs to be reflected in a company’s balance sheet. While corporate sustainability reporting accomplishes this to some extent, such reports are voluntary. They generally do a poor job connecting the dots to financial performance and risk. Further muddying the picture, both financial and sustainability reporting tend to be backward looking, fragmented and short-term (The Guardian, March, 2012)
Now though, things, they are a changin’… Welcome to the advent of ‘Integrated Reporting’
In the name of transparency, risk and credibility organisations are being exposed to a holistic lens that will ask questions that move beyond traditional assessment of financial performance, such as reductionist views on Return on Assets, to questions on the impact of management structures and leadership upon the future financial performance of assets.
Integrated Reporting enables an organization to communicate in a clear, articulate way how it is drawing on all the resources and relationships it utilises to create and preserve value in the short, medium and long term, helping investors to manage risks and allocate resources most efficiently.
The IIRC (International Integrated Reporting Council) stated:
“By describing, and measuring where it is practicable, the material components of value creation and, importantly, the relationships between them, Integrated Reporting results in a broader explanation of performance than traditional reporting. In particular, it makes visible all the relevant capitals on which performance (past, present and future) depends, how the organization sues those capitals, and its impact on them”
The Indiana CPA Society recently raised the issue of Integrated Reporting on its ‘Smoke Detector’ blog, part of their sensory network that looks at changes in the environment that could impact the accounting/auditing profession.
How do you measure a company’s environmental footprint or its future sustainability? If we don’t know how to measure it in terms that we are familiar with, should we ignore it? You can’t ignore the elephant in the room; integrated reporting is gaining a lot of traction in the global economy. Doesn’t it make sense that reports on environmental impact and long-term sustainability should be included with the financial statements to provide investors with the whole picture? Aren’t we the experts on financial statements? If we are attesting to the accuracy of the financial statements shouldn’t we also provide this same level of assurance to the integrated reports?
This is a very real change. Organisations that are currently embracing this approach, piloting frameworks that could stimulate a paradigm shift in the way that organisations look at knowledge resources and their development, are listed at the end of this blog. The point is that with this shift in thinking comes a tremendous opportunity for Knowledge Management practitioners, especially those versed in the softer (HR) side of KM and its relationship to dynamic and agile responses to complexity.
Integrated Reporting will be clear and comprehensible, providing a meaningful assessment of the long-term viability of an organisation, meeting the information needs of investors and other stakeholders, and supporting the effective allocation of financial, manufactured, human, intellectual, natural and social capital.
For me, and I have said it before, Knowledge Managers and Human Resource experts have a big part to play in mitigating the risk of complexity upon the organisation. Now, through Integrated reporting, it might just be possible to lift the ‘value add’ of the KM and HR professions in the eyes of senior/executive management teams.
Dare I think it, might we actually be moving to the day when KM and/or HR becomes the experience of choice for tomorrow’s executives? <pinch me, I’m dreaming>
|AB Volvo – Volvo Group||Sweden||Automobiles|
|AEGON NV||Netherlands||Financial services|
|ARM Holdings plc||United Kingdom||Technology hardware & equipment|
|Association of Chartered Certified Accountants||United Kingdom||Accounting|
|Atlantia S.p.A.||Italy||Industrial transportation|
|BAM Group||Netherlands||Construction & materials|
|BWise B.V.||Netherlands||Support services|
|Chartered Institute of Building, The||United Kingdom||Professional organization|
|Chartered Institute of Management Accountants, The||United Kingdom||Accounting|
|Cliffs Natural Resources||United States of America||Industrial mining & metals|
|CLP Holdings Limited||China||Electricity|
|Deloitte LLP||United Kingdom||Accounting|
|Diesel & Motor Engineering PLC||Sri Lanka||Industrial engineering|
|Edelman||United States of America||Media|
|ENAGAS S.A||Spain||Gas, water & multiutilities|
|EnBW Energie Baden-Württemberg AG||Germany||Electricity|
|eni S.p.A.||Italy||Oil & gas producers|
|Ernst & Young Nederland LLP||Netherlands||Accounting|
|Ernst & Young ShinNihon LLC||Japan||Accounting|
|Eskom Holdings SOC Limited||South Africa||Electricity|
|Flughafen München GmbH||Germany||Transportation services|
|Gold Fields||South Africa||Mining|
|Grant Thornton UK LLP||United Kingdom||Accounting|
|HSBC Holdings plc||United Kingdom||Banks|
|Hyundai Engineering & Construction||South Korea||Construction & Materials|
|Indra||Spain||Software & computer services|
|Industria de Diseño Textil S.A. (Inditex)||Spain||General retailers|
|Jones Lang LaSalle||United States of America||Real Estate|
|LeasePlan Corporation N.V.||Netherlands||Financial services|
|Marks and Spencer Group plc||United Kingdom||General retailers|
|MASISA S.A.||Chile||Forestry, wood and boards|
|Microsoft Corporation||United States of America||Software & computer services|
|N.V. Luchthaven Schiphol||Netherlands||Transportation services|
|National Australia Bank Limited||Australia||Banks|
|New Zealand Post||New Zealand||Postal services|
|NHS London||United Kingdom||Health care|
|Novo Nordisk||Denmark||Pharmaceuticals & biotechnology|
|Prudential Financial, Inc.||United States of America||Financial services|
|Randstad Holding N.V.||Netherlands||Support services|
|Rosneft||Russian Federation||Oil & gas producers|
|Sainsbury’s||United Kingdom||Food retail|
|SAP||Germany||Software & computer services|
|Showa Denki Co. Ltd.||Japan||Household goods & home construction|
|SK Telecom||South Korea||Telecommunications|
|SNAM S.p.A.||Italy||Oil & Gas|
|State Atomic Energy Corporation ROSATOM||Russian Federation||Nuclear industry|
|Stockland||Australia||Real estate investment & services|
|STRATE||South Africa||Financial services|
|Takeda Pharmaceutical Company Limited||Japan||Pharmaceuticals & biotechnology|
|Tata Steel||India||Steel producers|
|Teck Resources||Canada||Industrial Mining & Metals|
|The Clorox Company||United States of America||Chemicals|
|The Coca-Cola Company||United States of America||Beverages|
|The Crown Estate||United Kingdom||Real Estate Management|
|Transnet||South Africa||Transportation services|
|Unilever||United Kingdom||Retail Goods|
|Vestas Wind Systems||Denmark||Alternative energy|
|Via Gutenberg||Brazil||Support services|