Competitive profits and the annual report: measuring the sustainable business

Abstract

Purpose

Getting rid of the contradictions between financial and sustainability reports is not straightforward, owing to their disparate financial-, environmental- and people-related data. The purpose of this paper is to show how a big step toward integrating the reports can be made by focusing on extracted value and subtracting it from reported profits. Value extraction is defined as value captured from stakeholders by distorting the competitive market process.

Design/methodology/approach

Value extracted is identified by looking at three ways in which it is done: manipulating markets to enhance profits, exploiting market distortions to socialize costs and privatizing benefits. These categories are related to one consolidated bottom-line using the data from JPMorgan’s 2012 reports. Application to the Western oil majors shows how one bottom-line can be used to assess the risks posed by value extraction to the economic sustainability of a firm.

Findings

Conservatively estimated, JPMorgan’s value extracted in 2012 was 25 per cent of reported profits. From 2007-2009, the average annual value extracted by Exxon and Chevron was 17 and 16 per cent of reported profits, respectively, whereas for BP and Eni, it was 23 and 30 per cent, respectively. Higher value extraction by BP preceded the Deepwater Horizon explosion and, in Eni’s case, the political disruption of its activities.

Research limitations/implications

It is difficult to get precise numbers on the value extracted because sustainability costing and related data are often neither available nor standardized.

Social implications

Reported profits minus value extracted, defined as competitive profits, provide a proxy for one bottom line that integrates the financial and sustainability reports.

Citation

Strebel, P., Cording, M. and Shan, J. (2016), "Competitive profits and the annual report: measuring the sustainable business", Journal of Business Strategy, Vol. 37 No. 2, pp. 42-49. https://doi.org/10.1108/JBS-03-2015-0028