Discussions at Davos this week include some clues as to the direction that should be taken in corporate reporting. Of course, the focus in Davos is on country reporting, but the parallels are clear.
In a discussion of the need for a six part balance sheet, reference was made to the work of "Nobel economist Amartya Sen’s concept of ‘capabilities’. The question he posed was: what do people need to allow them to lead the kind of life they want? This is most naturally measured in terms of access to several kinds of assets. Do they have financial capital? But also human capital (education and skills), physical capital (infrastructure such as roads, housing), intangible capital (examples include patents, goodwill, or data), natural capital (clean air, green space, a healthy ecosystem), and social capital (a well-functioning community or nation)".
A comparison of the six concepts of capital - financial, human, physical, intangible, natural and social - to corporate reporting can yield some useful insights. Here, we should talk about the full range of corporate reporting - the financial statements and all the related disclosures such as the MD&A, the annual report, the corporate website and the regulatory reports. Of course, traditional financial reporting has always centered on financial capital. It even does a pretty good job of that, although there are critics and unresolved issues. Physical capital, as well, is measured in traditional reporting, although the state of the infrastructure is not widely reported. Deferred maintenance, for example, is often not reported.
We have seen an increase in reporting on human capital in recent years, but such reporting lacks a framework and is, at best, incomplete. Intangible assets have long been reported in traditional financial statements, but again there is an incomplete aspect, since purchased intangibles have been reported, but not internally developed intangibles. Also, although there have been attempts to measure cost and cost consumption, the nature and worth of those intangibles has not been addressed very well - and cost consumption measurements have historically been somewhat erratic.
Reporting on natural capital has improved in recent years with the growth of sustainability reporting. But the reporting on social capital has been sporadic and scattered at best, with much of it focused on random comments about corporate culture and the corporate "family", with little real objective attention given to the idea of what has the company done to actually contribute to the wider society, the community and the nation. Again, there has been no framework nor structure for such reporting.
There is much to do to bring corporate reporting to a standard that meets the needs of the twenty-first century. Davos provides some good insight.
One article on the Davos discussion can be found here.