Investors and analysts are under pressure as never before to cut the short-termism that
infects management and causes such economic damage. But existing analysis methods are
no help in getting from firms' strategy statements to what investors want — sustained
growth in free cash flow. But there is hope …
The world's largest accounting firms and regulators form the International Integrated Reporting
Council www.theiirc.org, working on guidelines
for Integrated Reporting – "… a concise communication about how an organization's
strategy, governance, performance and prospects, in the context of its external environment,
lead to the creation of value over the short, medium and long term.". The guidelines also
require reporting of social and environmental impacts. This needs:
- specification and quantification of the main substantive elements of a business aside
from its finances — customers, staff, products and capacity
- a formal and rigorous functional model that captures how the business actually
works and delivers performance.
To date, no such model has existed, nor has there been any adequate definition of the
elements required to produce such a model, so efforts at Integrated Reporting remain
qualitative, judgemental and overly complex.
The objective is challenging to fulfil because of the problematic features of any
business system — accumulation processes, interdependence, feedback and threshold
effects. But these are precisely the mechanisms in complex systems (such as a business)
that strategy dynamics is designed to deal with - explicitly and quantitatively.
See a summary of the solution at
http://sdl.re/IntegratedReporting (Video 33 mins).