One of the key concepts at the root of the Integrated Reporting Framework is the multi-capital model. This model takes a broad view of a company’s value creation system.
The Framework identifies six key types of capital that support value creation in all companies. I recently made the case that all the capitals are equally important because they are part of a system that is only as strong as its weakest part. However, even though they are equally important, they are not all the same.
As you make your journey to integrated reporting, there are three key characteristics of the capitals that you’ll want to understand:
Scarce or Abundant? Scarcity is one of the core characteristics of traditional economics. It applies to all physical resources (blame it on physics). Tangible assets are scarce. But knowledge-based intangibles can be abundant. I don’t know less if I share my knowledge or a knowledge product like software. This makes for interesting growth trajectories of knowledge-based businesses.
Tangible or Intangible? The distinction between tangible and intangible in business comes out of accounting. Tangibles are easier to count and own. Intangibles can be hard to identify, separate and track using a transaction-based accounting system. As the role of intangibles has grown in business, the usefulness of the balance sheet has declined (another good reason for integrated reporting….)
Owned or Attracted? The question of attraction is very important to understand the purpose, audience and practice of integrated reporting. If you don’t own a resource, you have to give as well as take value to continue to earn the right to use it. But you can’t attract resources just by telling people how profitable you are. You need to make the case about your overall value creation.
These characteristics each have implications for how the capitals are measured and managed. Tangible assets can be controlled but intangibles have to be cultivated. And the options for measuring each are different.
The graphic above was developed for an article I wrote a few months ago for the Social Value and Intangibles Review called The Integrated Reporting Value Proposition: Who should care about the capitals and why?