The book of the month: “The Value Reporting Revolution” by Robert G. Eccles, et al.

News categories: the New Economy economics, investor and stakeholder relationship management, strategic enterprise management

When it comes to establishing stock prices, analysts, institutional and private investors, as well as capital markets at large, act in the dark. They simply do not have or can’t get the kind of information they need to value companies properly or accurately. The result ? Extreme volatility.

Traditional corporate reporting practices are inadequate and downright dangerous in the New Economy. They are inadequate because they don't capture the non-financial measures and intangible assets that now drive value. Many companies possess intangible assets today – like an outstanding work force, a commanding market share, or instant brand recognition – that provide value far in excess of their tangible assets. Certainly, the market recognizes these “soft” assets and factors them into projections of cash flow and then prices shares accordingly. But because the kind of information that companies regularly report simply do not serve today’s investors well in their valuation and cash flow estimations, these estimations are widely subject to speculations and assumptions without any fundament, resulting often in wild up and downs of share prices. The information vacuum is filled with gossip flowing around today at light speed through the Internet. In the best case of a unjustified share price move, it was due to a rumor or an accidentally false information. In the worst case it was a manipulation.

With “The Value Reporting Revolution”, a former Harvard Business School professor and three accountants at PricewaterhouseCoopers, are calling for a new approach in corporate reporting. Traditional financial statements, designed to the requirements of the industrial age, have lagged far behind the evolution of the knowledge and intangibles based networked economy. In order to decide whether or not a company is a good investment, analysts and investment professionals need to know as much as possible about the company's tangible and intangible assets, as well as a variety of critical performance measures. The authors make the case, that a new type of “value reporting”, which provides outside parties like investors but also other important corporate stakeholders with more transparency about how a company is doing, will also help corporate executives to get out of the never-ending and highly dysfunctional earning game focused only on short-term earnings, which in reality says very little about future stock price performance. Until managers begin reporting performance on all the measures they use internally, they will continue to be forced to slightly beat quarterly earning expectations and carefully managing them prior to their announcements.

The authors' remedy therefore is disclosure of more and better information. The Value Reporting approach calls on corporate executives to provide more, rather than less, of the kind of information they use to create value. It exhorts investors to demand that companies do this. It urges boards of directors to make sure it gets done. And it puts accounting firms and securities analysts on notice that they must become part of the solution rather than part of the problem.

The “Value Reporting Revolution” clearly explains why corporations must move toward greater transparency and, more importantly, it provides a comprehensive framework for achieving that goal. Among other important lessons, readers learn how to identify the gaps between how corporate managers perceive their disclosure practices versus how the markets see them, as well as how to leverage their organizations' electronic communications technology and tools to ensure easy access to vital information and more meaningful data analysis. By using internal performance measurement tools such as the Balanced Scorecard for external reporting, companies can focus more clearly on creating value rather than face a quarterly scramble to burnish their earnings picture.

This new model is presented in such detail that executives could use it as a blueprint in building new corporate reporting regimens. But you needn't be a corporate leader to appreciate the far-reaching implications of this book.
"The Value Reporting Revolution" gives a sound and comprehensive overview of what modern corporate information disclosure is or should be, addressing both finance professionals and the academic world. Having accomplished extensive research in the field of Value Reporting the authors are in a position to support their arguments with a variety of striking examples. It provides a comprehensive framework for achieving higher levels of corporate information disclosure and transparency.

The book, framed as a manifesto for change in the world of corporate reporting, is written in un-accountant-like language and is a must for everyone who is interested in the Value Management debate.

About the authors:

Robert G. Eccles is a founder and President of Advisory Capital Partners, Inc. and a Senior Fellow of PricewaterhouseCoopers. He was a tenured professor at the Harvard Business School.

Robert H. Herz is a partner with PricewaterhouseCoopers and the firm’s North America Leader of Professional, Technical, Risk and Quality.

E. Mary Keeganis head of the global corporate reporting group of PricewaterhouseCoopers, where she specialized in international corporate governance and reporting. She is also the Chairman of the U.K. Accounting Standards Board.

David M.H. Philips is a partner with PricewaterhouseCoopers in the Assurance/Business Advisory Services practice in the U.K. and serves as the European Leader of ValueReporting.

The Value Reporting Revolution: Moving Beyond the Earnings Game
by Robert G. Eccles, Robert H. Herz, E. Mary Keegan, David M. H. Phillips
Hardcover - 384 pages (March 2001)
John Wiley & Sons; ISBN 0471398799

For the topic of “Value Reporting” see also my newsletter from May 12, 2001 - A revolution in stakeholder oriented corporate disclosure – case study: The Shell Report

More about about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in my newsletters. To subscribe for my free-of-charge e-mail push newsletter click here.

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