The Changing Conception of Organisational Health

Some thirty years ago, evaluating the value of an organisation was largely down to the amount of physical assets it owned and the tangible, monetary returns it could provide its shareholders. Naturally, auditing and accounting practices were considered the bedrock for validating and truly measuring how “healthy” an organisation is. Thirty years ago.

However, gone are the days of Beatles break-ups, Berlin wall collapses and strictly financialised value.

Today, the world is a starkly different place – thus, organisational health, too, is a reformed idea. The emergence of “asset light” organisations such as Netflix, Spotify and Uber have raised interesting queries into what drives the success of organisations who don’t physically own that many assets. How do we measure, and importantly explain, the health of such organisations to potential investors?

Forbes recently reported that intangible assets have grown from filling 20% of corporate balance sheets to 80%. This is in large part due to the rising importance of intellectual capital vs. bricks-and-mortar and services vs. manufacturing. Conventional accounting methods are often found wanting when it comes to adequately measuring intangible value as effectively as tangible assets. When it comes to value-judgements and organisational health, a new approach is needed.

A cursory skim of some of the rhetoric painted by organisations is often variations of “our people are the centre of everything we do” and “our strategic partnerships help us create shared value”. While these may be true statements, especially for organisations operating in a changed post-asset intensive world, the amount of disclosure is often inadequate, with almost no elaboration made of people or partnerships in narratives around organisational heath.

Reporting practices are increasingly being looked at as a window into the relative health of an organisation. The “six capitals” are an enticing model for potential investors who want to practically assess the nature and quality of an organisation’s intangible assets. While there is still a relative fixation on the financial capital segment of the six capitals model, the practice of integrated reporting can and should play a key role in contributing data into the value of an organisation.

McKinsey recently published a study that defined a healthy organisation as one that has a shared vision, strategic clarity, role clarity and meaningful values among other things. When one looks at the recommended integrated reporting content elements, can organisations really afford to not buy into the <IR> hype?