This article pro-poses a journey.During the jour-

ney, an activity thatonce seemed routine—corporate performancereporting—will almost certainlycome to seem a strategic andevolving concern for corporateleaders. Sarbanes-Oxley and fol-low-up regulation from the SECand the securities exchangeshave shaken that sense of rou-tine. But now that corporateleaders have been forced to paycloser attention to corporatereporting and the processes thatgenerate sound reporting, thereis something innovative andtruly interesting for them toexplore: a new reporting modelthat will far better serve theneeds of investors, and there-fore far better serve the futureof the company.

The current financial report-ing model does not allow theuser to evaluate the quality orsustainability of corporate per-formance, to differentiate goodmanagement from bad, luckfrom skill. Its dependence on ageneric set of financial indica-tors encourages companies toplay the “earnings game,” leavesstakeholders suspicious of mana-

gerial intent, and forces investorsto fly blind—and if not blind,then with unnecessary blinders.The result is a wholesale misal-location of scarce resources,both within the firm as man-agers forsake important invest-ments that might temporarilyreduce earnings, and amonginvestors who are unable to ana-lyze accurately the risks andreturns associated with anygiven asset.

These observations are notentirely new—but they arenewly important to corporateleaders, who now have an oppor-tunity to make strategic use ofhigher-quality corporate report-ing. For many years, a wealth ofacademic literature, governmentfindings, and worthy mediareports have catalogued the fail-ings of the current financialreporting model and the eco-nomic consequences that ensue.What has changed is the urgencyof the debate. After a successionof high-profile corporate scan-dals rocked global capital mar-

kets, the world wokeup to the profoundimpact that an inade-quate focus on corpo-rate transparency andaccountability can

have on the real economy.This article acknowledges

the need for reevaluation of thecurrent regulated reportingmodel, yet cautions againstthrowing out the baby with thebath water. Instead, it suggeststhat significant practical stepscan be taken to rebuild the capi-tal markets’ confidence in cor-porate reports through the inclu-sion of a coherent framework ofsupporting information.

Not all of this additionalinformation can be valued indollars and cents. Not all of itcan even be objectively mea-sured. However, this article illus-trates that, when presented in astructured fashion, additionalinformation will allow the userto assess whether today’s finan-cial results may be attributed togood management or luck and,more critically, whether today’sfinancial results may be expect-ed to continue in future periods.

Corporate reporting is a mat-ter of regulatory compliance—but also more than that. And it is

An activity that once seemed routine—corporateperformance reporting—is now a strategic, evolv-ing concern. © 2003 Wiley Periodicals, Inc.

Alison Thomas

Why Corporate Reporting Is a StrategicOpportunity

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63© 2003 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.10219

a technical and organizationalchallenge—but also more thanthat. Corporate reporting is anew competitive arena: Compa-nies that understand and measuretheir own key engines of valuecreation and report on themtransparently will fare better overthe long term and they are likelyto enjoy greater investor loyaltywhen the inevitable bad patchescome along. The decision to jointhis competition is in the handsof senior executives.

FALLING BEHIND THE TIMES

The origins of the reportingstandards used today may betraced to the era whenmass manufacturers domi-nated the industrial base ofthe country. A need toattract funding into thesecapital-intensive industriesstimulated a search for apractical tool that wouldallow factory managers toassure investors that their moneywas being wisely deployed.

The success of the regulatedreporting model in fulfilling thisrole is widely accepted and, tothis day, its structure remainsrelevant to evaluating the qualityand sustainability of the perfor-mance of such firms. However,many of us would agree that itsrelevance decreases whenapplied to enterprises for whichsuccess is a function of intangi-ble factors of production such asbrand, employees, and the orga-nizational capability of the firmto innovate. The importance ofthis question of relevance hasincreased to a critical point asthe intangible base of the econo-my has grown.

THINKING ABOUT INTANGIBLES

When a mass manufacturerwishes to signal its long-term

strength, it needs to demonstratethat it generates an adequatereturn on its huge base of fixedassets and that it is a low-costmanufacturer. But when a tech-nology company wishes to signalits future prospects, how can itconvey the strength of its intel-lectual capital base? In contrastto physical assets, intellectualcapital derives much of its valuefrom unique characteristics: itcan be deployed simultaneouslyin multiple tasks, it can haveincreasing returns to scale(because knowledge is cumula-tive), and it grows through wavesof communication in which allparticipants learn (customer tells

designer who tells engineer whotells R&D director who tells cus-tomer who…).

Despite these highly differ-entiated attributes, intangiblescould still be evaluated if therewere an organized exchangewhere they trade. However, thisis not typically the case. Further-more, even if there were somepricing mechanism, one wouldhave to address the issue ofproperty rights. Except in thecase of intellectual property pro-tected by a watertight patent, theownership of intellectual assetsis often in question. This makesthem inherently more risky thanphysical assets.

The scale of this issue iswell-illustrated in Exhibit 1.Taken from EU-funded researchon the measurement and man-agement of intangible assets (thePRISM project), it highlights themismatch between assets that are

readily measurable and thosethat, in today’s world, are morelikely to underpin competitiveadvantage.

To date, accounting stan-dards have focused on the evalu-ation of the tangible goods to theleft of the flow chart in Exhibit1. With the adoption of FinancialAccounting Standard (FAS) 142,Goodwill and Other IntangibleAssets, U.S. regulators havestarted to move into the secondchevron—the intangible goodsarea. However, the sources ofcompetitive advantage in today’seconomy lie firmly to the rightof the diagram—an areauntouched by any of the world’s

accounting standards. Thevery nature of these criticalassets means that they areunlikely to be best commu-nicated through the currentfinancial reporting frame-work. And yet it is theseresources and competenciesthat need to be understood

for efficient resource allocationto occur.

VENTURING BEYOND THEBALANCE SHEET

Various attempts have beenmade to develop a new report-ing framework that does justiceto critically important intangi-bles. One of the earliest pro-posed solutions arose from thework of the Brundtland Com-mission. In 1987, it developed areport entitled “Our CommonFuture,” which introduced thenow ubiquitous phrase “sustain-able development.” This reportemphasized the idea that issuesof balance and equity are essen-tial to long-term development.This fundamental tenet wasdeveloped by SustainAbility, aBritish consulting firm, intowhat is now known as the“triple bottom line.”

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Corporate reporting is a new competi-tive arena…

Triple bottom line refers tothe expansion of the traditionaleconomic bottom line to threeareas, namely, economic pros-perity, environmental quality,and social justice. These con-cepts should, it is argued, perme-ate all levels of corporate gover-nance and strategy in order toachieve long-term success.

This framework has made asignificant impact on the report-ing world, with Shell’s high-pro-file adoption of the frameworksealing its credibility. However,the triple bottom line model isinsufficiently prescriptive toallow stakeholders to compareperformance over time andamong industry peers. Over-coming this limitation was oneof the original motivations forthe formation of the GlobalReporting Initiative (GRI).Originally convened by the

Coalition for EnvironmentallyResponsible Economics(CERES) and the UnitedNations Environment Pro-gramme (UNEP), the GRI is amost ambitious effort to devel-op a set of non-financial stan-dards. A long-term, multi-stake-holder initiative, it aims todevelop and disseminate global-ly applicable “SustainabilityReporting Guidelines.” Compa-nies can then use the guidelinesvoluntarily to make visible theirmanagement of the triple bot-tom line.

But implementing the GRIis not without conceptual andpractical difficulties. Mostnotable among these is the factthat it presents its long list ofmeasures and metrics in ageneric reporting format, whichencourages a “checklist”approach to reporting.

DiPiazza Jr. and Ecclesrecently addressed this concernin Building Public Trust.1 Advo-cating three “tiers” of informa-tion, this book recognizes notonly the need for non-financialinformation, but also the neces-sity of moving beyond the “one-size-fits-all” view of corporatereporting through the provisionof information that conveys thedifferent dynamics at work indifferent industries and in specif-ic companies.

In this vision of the future ofreporting, the authors are notcalling for a wholesale departurefrom the traditional financialmodel. Indeed, they see financialoutcomes as the common denom-inator for the effective evaluationof all companies, regardless ofterritory or industry.

But to understand the quali-ty and sustainability of corpo-

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Exhibit 1

The Asset Structure of Business Today

rate performance, measures thatextend beyond the financial areclearly required. The second tierof the reporting model starts toaddress this need with a call forstandard metrics that may bespecific to a given industry butwhich are comparable across allplayers within that industry.Some of these metrics may bevalued in dollars and cents, suchas “proven and probablereserves” in the oil and gasindustry. Others will be capableof evaluation as trend data accu-mulates—for example, “samestore sales” in the retail industrymight exemplify such a mea-sure. And more still is neededfor a thorough understanding ofcorporate performance. Everycompany approaches the oppor-tunities and risks of its industryin a unique way. Those uniquefeatures need to be clearly artic-ulated for the user to understand

the sustainability of corporateearnings.

Obviously, a key questionraised by this model concernsthe type of information needed,industry by industry, to populateeach of the tiers. Pricewater-houseCoopers has spent the pastsix years trying to build anunderstanding of just that.Through a series of global indus-try surveys, we have askedCFOs, sell-side analysts, andinvestors to identify the factorsthey consider critical for successin a given industry. The resultsof these empirical analyses havebeen codified into the ValueRe-porting® framework.2 The gener-ic version of this framework isgiven in Exhibit 3.

From this codification of thesurvey findings, it can be readilyseen that users of corporatereporting are looking for fourbasic building blocks of infor-

mation. The first category ofinformation that investorsdemand, and that managersdeem essential, the “marketoverview,” revolves aroundanalysis of the economic andcompetitive landscape of thefirm. The framework then sug-gests the intuitively obvious—that it is only in the context ofmarket position that strategy hasmeaning. Equally, a company’sstrategy is only credible if it canbe demonstrated that the compa-ny has competencies andresources (“value-creating activi-ties”) at its disposal to deliver onits stated objectives. Finally, onlywhen this picture is in place canthe financial performance of thecompany be understood.

This framework, though pre-sented here in its generic form, istailored in actual use to reflectthe findings of each globalindustry survey. Thus, for aretailer, the research highlightsvarious customer and store basemetrics; for a bank, among otherthings, customer penetration andretention are emphasized; and soon. The result is a framework thatprovides the user with a robuststarting point for understandingthe quality and sustainability of acompany’s performance. Ratherlike the lid of a jigsaw puzzlebox, it helps the user to makesense of the disparate pieces ofinformation that may be offered.

This is probably best illus-trated through a simple example.Take the case of a hypotheticalretailer, Tell All Disclosures, Inc.It announces that its revenues forthe year are up by 10 percent. Assomeone trying to evaluate thisperformance, what am I to think?Traditionally, I would try to gaincomfort on the quality and sus-tainability of this number bygoing through the financial state-ments. But how far can that getme in my desire to understand

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Exhibit 2

The Three-Tier Model of Corporate Transparency

Source: PricewaterhouseCoopers

the company’s returns? What canI draw upon within the financialreport that would allow me todifferentiate good managementfrom bad, luck from skill?

How would the ValueReport-ing® framework approach thischallenge? It would start byexamining the market conditionsin which the firm operates. Anobvious question might be “Howhas the peer group performed?”Let us assume that, upon exami-nation, it becomes clear that TellAll’s competitors saw an averageincrease in revenues of just 2 per-cent. How does that alter my com-fort with the 10 percent reportedby the company? Frankly, I amnow more curious, but little wiser.How has that higher growth ratebeen achieved?

To piece together the puzzle,the ValueReporting® frameworksuggests moving on to the com-pany’s stated strategy. Has TellAll been making acquisitions, orhas it been growing the storebase aggressively? Does one ofthose activities explain its supe-

rior growth rate? If so, I under-stand the economic outcomes ofthe company’s strategy. But ifnot, I am left curious as to thesource of the observed perfor-mance. Well, all might not belost. Perhaps they have managedtheir internal resources withgreat skill. To investigate thishypothesis, the industry-specificValueReporting® frameworkwould suggest that I examinesuch measures as customer satis-faction. If it has risen sharply, Ibreathe a sigh of relief as I lookforward to a prosperous future.But what if this has actually fall-en over the period? If so, a veryuncertain picture emerges. Hasthe company grown by pushingproduct aggressively to a reluc-tant customer base? Will thereturn rate increase as unwantedproduct flows back into thefirm? Might the company haveused an unconsolidated vehicleto park inventory? Even iftoday’s numbers are a truereflection of momentum built inyears gone by, the sustainability

of the performance must surelybe questioned.

Although a purely hypotheti-cal example, it illustrates thetype of coherent structure thatinvestors need for the informa-tion provided by management inorder to make sense of corporateperformance. An increase in thevolume of data is not necessarilythe answer. Indeed, in somecases, an excess of data obscuresinformation that would allowunderlying performance to beunderstood. However, very fewcompanies help the reader to“connect the dots” through aneffective structuring of theirinformation. The link is rarelymade between strategic intentand trend data that illustrate thecompetencies and resources ofthe firm to deliver on strategy.Critical blocks of informationare ignored. For these reasons,investors tend to judge corporateperformance by a mere handfulof indicators, such as earningsper share or profit. This is not inthe interest of investors.

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Exhibit 3

The ValueReporting® Framework

Source: PricewaterhouseCoopers

And it is not in the interestof management. Senior execu-tives, stewards of their compa-ny’s future, want investors tohave a well-rounded, accurateview of the company’s perfor-mance and prospects. A reputa-tion for transparent and thoroughreporting in good times and badis a far more valuable asset thana temporary rise in share pricebased in part on somewhat con-fusing and fundamentally incom-plete information.

THE REWARDS OF LABOR

If management wishes itsfirm to be fully valued by thecapital markets, it needs to pro-vide investors and their advisorswith sufficient information toevaluate whether today’s perfor-mance has been achievedthrough skill or luck. Has man-agement been investing to main-tain or grow market position, orhas it been acting in a fashionthat is likely to detract fromfuture prosperity? If perfor-mance today has been achievedthrough cuts in staff training,environmental safety procedures,needed new technology, and soon, investors might rightly feelcautious. Similarly, if a substan-tial investment in a customerrelationship management systemgenerates disappointing finan-

cials in the short term, manage-ment can only expect investorsto “look across the valley” to thepositive outcomes of this invest-ment if it conveys to investorsthe critical importance of cus-tomer satisfaction as a long-termsuccess factor.

Will managers be suitablyrewarded for their efforts if theyembrace a more structured andcomprehensive approach to cor-porate reporting? Empirical evi-dence suggests that this is so.The greater the certainty of capi-tal markets concerning corporateperformance, and the higher thedegree of quantification support-ing reports on intangible assetmanagement, the lower the costof capital will be.3 This is animportant finding, with strategicimplications for decision makers.Moreover, case studies suggestthat such transparency is alsovalued by employees, customers,suppliers, business partners, andso on. In short, it appears thatstakeholders of many kinds pre-fer companies that can demon-strate their managerial competen-cy in a structured, coherent,reasonably transparent, and com-prehensive fashion.

Given these benefits, whywould companies not embracechange? Experience in manyparts of the world shows thatthere are several key impedi-

ments to progress. The first ismindset. Executives must bewilling to be transparent, andtheir willingness depends onunderstanding the impact oftransparency on their company’smarket valuation. The second isinformation set. Companies mustbe functionally able to be moretransparent. Information onemployees, R&D programs, etc.may exist within the firm, butisolated in informational silosrather than integrated into strate-gic evaluation systems. A coher-ent framework of information isnot reported externally because itoften does not exist internally. Inthe relatively benign market con-ditions of the past few decades,such complacency has not beenseverely punished—a rising tidehelped all. However, in today’smore austere environment, it istime to take stock and act.

NOTES

1. DiPiazza, Jr., Samuel A., & Eccles,Robert G. (2002) Building public trust:The future of corporate reporting. NewYork: John Wiley & Sons.

2. Eccles, Robert G., Herz, Robert H.,Keegan, E. Mary, & Phillips, David M.H. (2001). The ValueReporting revolu-tion: Moving beyond the earningsgame. New York: John Wiley & Sons.

3. See, for example, Gietzmann, M.,Shyla, A., & Thomas, A. (2002, Spring).Winning the competition for capital.European Business Forum, 9, 80–83.

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Alison Thomas is a London-based director of the PriceWaterhouseCoopers ValueReporting team who setsits global research agenda and works with executives worldwide to help them add economic value to theircompanies through improved corporate reporting. She earned her doctorate at the London School of Eco-nomics for work focused on intangible asset evaluation. She also has a master’s degree in finance andaccounting from the same institution and a bachelor’s degree from the University of Oxford. She is a fel-low in management at St. Catherine’s College, Oxford.