Next month (May) the International Integrated Reporting Council will tell us what came out of its recent request for input on revising various parts of the <IR> Framework.

In case you missed it, in February the council asked for submissions on tweaking and updating the now seven-year-old Framework. The (short) window for submitting input on three topic papers has now passed and next month a consultation draft will be released using feedback received.

The really interesting topic paper is number 2 which concerns the business model and, in particular, the distinction between outputs and outcomes. The topic paper noted that a recent snap survey had shown that many IR preparers were confused about the difference between the two – which meant that they weren’t properly reporting on how the business model impacted value creation.

The paper asks whether the Framework should suggest that value creation can also mean value preservation and erosion? (Which touches on the slightly oxymoronic implications of the term “value creation” but that’s another Pandora’s can of hornets. . . )

The paper goes on to ask whether IRs should give quantitative as well as qualitative information to support assertions about value creation. Yes please. Of course we want discussion of outcomes and the effects that strategy has on value creation – or its opposite – to be balanced, with the bad being as candidly disclosed as the stuff that makes for good PR. And if organisations can put reliable numbers to the effects their outcomes have on value creation, that would be brilliant. 

 

Value creation is the outcome

This, then, is why topic paper 2 is so interesting. And why it’s so important. If <IR> practitioners themselves are a bit muddled about what outcomes are, what chance do we IR zealots have of convincing our C-suites to take us seriously? Topic paper 2 sets out to clarify what outcomes are all about. And how they translate into value creation, a worthy, indeed essential, objective.

Consider now two South African IRs which regularly win awards and whose 2019 editions have just been released, to get an inkling of how challenging, in reality, translating outcomes into value creation is going to be.

The first is Gold Fields, which lists its outputs as the gold and copper it produces as well as its emissions and waste. The miner then lists its outcomes which include (these are just examples) how much water it recycled, the value of salaries paid and how much it spent on its communities.

The second is ArcelorMittal South Africa. The steelmaker includes a discussion of “outputs and outcomes” on a spread explaining its “value creation model” – which includes its business model.

In that discussion the company includes things like salaries, socioeconomic-development and supplier spend. But it doesn’t include the considerable amounts of waste it produces, as either an output or an outcome. Yet ArcelorMittal South Africa is well aware of the importance of its waste (mostly slag) because it’s not merely an unavoidable by-product, it generates revenue by selling the stuff, for use in building roads and making concrete.

In fact, the 2019 report includes a substantial discussion on the legal dispute it is having with government over whether its slag is a by-product or whether it’s waste. If it’s the latter, the company’s slag-buying customers are legally obliged to get waste licences, which they are obviously loath to do.

In effect, the Department of the Environment, Forestry and Fisheries’ legal argument is that ArcelorMittal South Africa’s waste represents only an output and not an outcome which would have an effect on the company’s creation of value. The steel producer argues that slag is both – it has a definite (positive) natural-capital impact because it is used to build useful things like road and railway infrastructure and to obviate the need for other natural inputs.

Fancy that: deciding whether to call something an output or an outcome is not just an intellectual integrated-reporting consideration, it’s sometimes a legal issue!

Is it an output or is an outcome?

One could quite reasonably argue that salaries, socioeconomic spend, dividends and, yes, waste are outputs and not outcomes. And that the real outcomes and impacts on the capitals are things like wealth creation, happier community members and better social infrastructure.

Topic paper 2 states that “inputs and outputs are clearly defined and explained”, implying that no further correspondence on that subject will be entered into. But – never mind outcomes – maybe we need to revisit what constitute outputs.

If we really want our companies’ leaders to think in an integrated fashion, we need them to understand that their organisations’ raisons d étre are about much more than the stuff they can bill for – or have to send to landfill. Perhaps Gold Fields and ArcelorMittal South Africa should rather be classifying many of their outcomes as outputs. Wouldn’t that be a lot more integrated?

  • The output from us drafting this article is food for thought; the outcome is, possibly, to create uncertainty. Sorry about that. After the IIRC releases a proposed revised Framework in May those of us who missed the boat the first time round will have 90 days to comment.