Outside in and upwards - FutureValue
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Outside in and upwards
15/10/2013
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Traditionally corporate reporting has been about stating what has happened. It is an evidence-based approach to communication with stakeholders that should, subject to audit confirmation, be indisputable. It is quite simply black and white. It is the ‘inside-out’ approach to corporate reporting. It is based on fact. But the balance of corporate reporting is changing to embrace an ‘outside-in’ approach as well as the traditional ‘inside-out’ one. An ‘outside-in’ world is different in that it involves interpretation of the possible impact of the external environment on the internal realities of a Company, and is more often than not future based. For the first time the new Strategic Report explicitly links strategy and risk, with the aim: “to provide insight into the entity’s main objectives and strategies, and the principal risks it faces and how they might affect future prospects”. The definition and exposition of the business model in the Strategic Report also require an ‘outside-in’ perspective – it answers the question ‘Why?’, although many accountants are attempting to deny this as they promote an alternative internally focused post-strategy operational ‘business model’.

The ‘Exploring Strategic Risk’ survey by Deloittes in the USA discovered that companies around the world are now pre-occupied with strategic risk, finding that: “many companies are taking a broad view of strategic risk that doesn’t just focus on challenges that might cause a particular strategy to fail, but on any major risks that could affect a company’s long-term positioning and performance.” They refer to this as an ‘outside-in’ approach. This external perspective puts auditors and lawyers out of their comfort zone. It is not evidence-based. It is interpretation-based. That is the reality of the future of corporate reporting – interpretation and fact, side by side. But, the more important outcome of this insidious change in the balance of corporate reporting that addresses ‘outside-in’ as well as ‘inside-out’ is that it is putting corporate reporting back on the Boardroom agenda. It is pushing corporate reporting upwards from a middle management compliance task to a Boardroom priority as Directors grapple with the realities of how the dynamic external environment impacts on their internal realities. Given the potential enormity of strategic risk and the importance yet vulnerability of intangible value it is probably not before time, either.