Reporting in the FTSE 350

I recommend that you read Joining the Dots, a white paper by David Philips of PWC (you can find the paper and an accompanying video here). The paper summarizes a study of the narrative reporting by the largest 350 public companies in the UK. It puts forth the thesis that narrative reporting can go a long way toward improving transparency in the market, which is a worthy goal:

Reporting and communications are activities that, if done well, can deliver competitive advantage in a variety of ways from securing capital and credit, to winning in the war for talent and building strong business relationships. At times such as these, where markets are in a state of flux and where trust and confidence are in short supply, effective corporate transparency is even more critical for rebuilding trust and protecting the share price.

The study found that companies are reporting more information than they did in the past about their strategy, sustainability efforts, risks and key performance indicators (KPI’s). This should add to transparency. However, it also found that 82% of the time, there is not a clear link made between corporate strategy and the overall reporting. This and related findings point to the fact that companies are expanding disclosure but they are not necessarily communicating more effectively in the process. The paper includes a checklist for improving narrative reporting.

What the study does not say is that the reason we need better narrative reporting is that our economy is now fueled by knowledge assets, most of which are outside our financial reporting paradigms. Studies of the S&P 500 demonstrate that less than a quarter of corporate value (as determined by the stock market) is visible on the average company’s balance sheet. The remainder represents (indirectly) the value created by “intangible” knowledge assets. But there are no numbers available today to back this up. The only way for stakeholders to understand these invisible assets is through the narrative reporting.

This points to one of the greatest challenges of management in the current times. Our economy has sped forward into the Knowledge Era but the average businessperson goes to work armed with management tools developed during the Industrial Era. Business needs new tools optimized for the Knowledge Era.

I think the root cause of the lack of clarity in narrative reporting highlighted by the PWC study is that companies do not see themselves as knowledge businesses. I argue that every business today is a knowledge business. I’m not kidding. One of the examples I have used in speeches is how my local gas station is a bustling knowledge business. If my gas station is a knowledge business, I bet yours is too.

In order to be able to create effective reporting, you need to have a clear idea of the extent and nature of  your organization’s knowledge assets (competencies, processes, IP, networks and brands) and how you use them to create value for your customers. I think that descriptions of knowledge assets and strategy are the missing “dots” that would help increase the quality of reporting by the companies in the PWC study–and in your business too.