According to the Framework de ERM (Enterprise Risk Management) Framework by COSO (Committee of Sponsoring Organizations), the value of an organization is created, maintained, eroded, or realized based on the relationship between the benefits of resources and their costs.
The value of an organization is determined by the decisions of its managers, ranging from the overall strategy to day-to-day decision-making. In the past, this value was primarily measured by financial factors impacting the tangible assets (financial capital, fixed assets) of an organization.
However, over the years and with the paradigm shifts, including those within the financial market itself, this has changed significantly. Value is now measured by including intangible assets (reputation, brand, trust, organizational culture, intellectual capital, partnerships, integrity, and others). Moreover, the concept of value has expanded to encompass resources shared between an organization and society at large. Capital is no longer an isolated term, as it considers the various stocks and flows of capitals, recognizing the range of resources on which organizations depend.
Aligned with this thinking, we have the Stakeholder Theory, with Klaus Schwab in 1971, later reinforced by Edward Freeman in 1984, and Hart and Milstein in 2003, proposing a multidimensional model of value creation for shareholders, based on the premise that to create value for shareholders, it is also important to create value for the organization and other stakeholders.
Furthermore, according to COSO, recognizing that there is no universally accepted definition of value creation, the former Technical Task Force from International Integrated Reporting Council (IIRC) established a Technical Collaboration Group, which defined ten themes that inform the overall meaning and consider a broader definition of value, as described below:
- Value creation occurs within a context;
- Financial value is relevant but not sufficient to assess value creation;
- Value is created from both tangible and intangible assets;
- Value is created from both private and public/common resources;
- Value is created for an organization and for others;
- Value is created from the connectivity between a wide range of factors;
- Value creation is manifested in outcomes;
- Innovation is fundamental to value creation;
- Values play a role in how and what type of value is created;
- Metrics for value creation are evolving.
The IIRC developed the Integrated Reporting Framework ( Framework) to provide an approach for incorporating integrated thinking. Two important features of this framework are:
The value creation process: Value is created through an entity’s business model, which receives inputs from capitals and transforms them through business activities and interactions to produce outputs and outcomes that, in the short, medium, and long term, create or destroy value for the organization, its stakeholders, society, and the environment, as shown in the figure below:
The capitals
Integrated thinking recognizes the broader range of resources and relationships used and affected by the entity. While each entity can define significant physical and intangible resources it uses or affects using a multi-capital approach, the Framework defines six capitals: financial, manufactured, human, social and relationship, natural, and intellectual.
In this sense, it is important for the organization to be connected with the market's evolution, the sector’s sustainability challenges, and the needs of its internal and external stakeholders.
Knowing its risks and opportunities, as well as its positive and negative externalities, is key to creating Shared Value.
