03/06/2013 justinlyon

Using Simulation for Integrated Reporting

The International Integrated Reporting Council is working on guidelines for how companies should report information that more effectively explains to investors and other stakeholders how the business works. This, it is hoped, will enable better understanding of a firm’s performance and prospects, and tackle the issue of “short termism” amongst management and investors that is believed to be widespread and problematic. The guidelines also require reporting of social and environmental impacts.

To fulfill this aspiration requires specification and quantification of the main elements of a business aside from its finances (initially – customers, staff, products and capacity) and a formal and rigorous functional model that captures how the business actually works and delivers performance. As yet, no such model exists, nor is there any adequate definition of the elements that would be required to produce such a model, so efforts at Integrated Reporting remain qualitative, judgmental and overly complex.

The objective is challenging to fulfill because any business system features accumulation processes, interdependence, feedback and threshold effects that make it difficult to understand how and why performance changes over time. But these are precisely the mechanisms in complex systems (such as a business) that system dynamics and computer simulation are designed to deal with – explicitly and quantitatively. Strategy dynamics (simply a style of system dynamics analysis suited to organisational strategy and performance issues) offers the solution that Integrated Reporting requires, as explained in this presentation, which includes links to working models of a simple case.