Annual reports are failing to capture the full value of companies’ innovative activities, according to research funded by the Economic and Social Research Council.
For the most innovative companies, this may mean that analysts do not have enough information to work out their true market value.
A team of academics at Cass Business School at London’s City University analysed three unseen factors involved in innovation and their relation to business performance in almost 700 manufacturing and services companies.
These ‘intangibles’ were human capital (people and teams), structural capital (the processes, information systems and patents that remain when employees leave), and relational capital (links with customers, suppliers and other stakeholders).
The research found that conventional measures failed to reflect the drivers and effects of innovation in services.
A separate analysis of annual reports from 150 companies revealed that their coverage of intangibles was skewed towards their relational capital and away from human capital.
“While intangibles have grown in importance, conventional accounting technology remains ill-equipped to account properly for them,” said Chris Hendry, professor of organisational behaviour at the Cass Business School, who led the research.
The weak focus on aspects of human capital implied that much of what firms write about people in their annual reports has little bearing on future business performance, he suggested.
“This is not to say people don’t matter, but that firms either add much that is irrelevant to performance or do not emphasise what does matter,” Hendry said.