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Complexity and Knowledge Management Navigators…

Complexity and Integrated reporting, a new opportunity for KM?

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Today’s financial accounting standards are outdated.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
AES Brazil Brazil Utilities
AkzoNobel N.V. Netherlands Chemicals
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
BBVA Spain Banks
BNDES Brazil Banks
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
CNDCEC Italy Accounting
Danone France Food producers
Deloitte LLP United Kingdom Accounting
Deloitte Netherlands Netherlands Accounting
Deutsche Bank Germany Banks
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
Enel S.p.A. Italy 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
Eureko (Achmea) Netherlands Insurance
Flughafen München GmbH Germany Transportation services
Generali Group Italy Insurance
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
KPMG International Switzerland Accounting
LeasePlan Corporation N.V. Netherlands Financial services
Marks and Spencer Group plc United Kingdom General retailers
MASISA S.A. Chile Forestry, wood and boards
mecu Limited Australia Banks
Microsoft Corporation United States of America Software & computer services
N.V. Luchthaven Schiphol Netherlands Transportation services
National Australia Bank Limited Australia Banks
Natura Brazil Personal goods
New Zealand Post New Zealand Postal services
NHS London United Kingdom Health care
Novo Nordisk Denmark Pharmaceuticals & biotechnology
PricewaterhouseCoopers Advisory Italy Accounting
PriceWaterhouseCoopers N.V. Netherlands Accounting
Prudential Financial, Inc. United States of America Financial services
Rabobank Netherlands 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
SASOL South Africa Chemicals
Showa Denki Co. Ltd. Japan Household goods & home construction
SK Telecom South Korea Telecommunications
SNAM S.p.A. Italy Oil & Gas
Solvay Belgium Chemicals
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
Telefónica S.A. Spain Telecommunications
Terna S.p.A. Italy Electricity
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
Vancity Canada Banks
Vestas Wind Systems Denmark Alternative energy
Via Gutenberg Brazil Support services

2 comments on “Complexity and Integrated reporting, a new opportunity for KM?

  1. Pingback: Integrated Reporting « Global Strategy in 10 weeks

  2. Pingback: Complexity: Response and Value (The Resilience Value Proposition) | Theknowledgecore's Blog

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