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Accounting for value I: stakeholder engagement

For the next few columns I will consider the principles for accounting for value.

Social Return on Investment (SROI) is a method for accounting for value based on seven principles. Why are these important? Financial accounting is also based on a small number of principles, which can be applied whatever the organisation size. Consistent, shared principles mean there is no need to ask which method of accounting was used while recognising that there is little point comparing differences between small and large.

The first SROI principle is involving stakeholders in what gets measured, and how it is measured and valued. A Guide to Social Return on Investment states: ‘Stakeholders are those people or organisations that experience change as a result of the activity and they will be best placed to describe the change.’ Value, therefore, is in the eye of the stakeholder.

Asking beneficiaries if you have met your objectives is not enough. Involve your stakeholders in understanding what changes they experience as a result of your activities – if these changes are significant (measuring only material changes is itself a principle) then they should be included in the analysis. People need to be involved through the whole process.

This doesn’t mean being led by stakeholders’ views; other relevant sources will guide too. This requires judgment; but financial accounting also requires judgment. Time and experience will ease this process as they have for financial accounting.

Remember not all changes will be positive! Stakeholders should see and comment on the analysis and be kept informed of changes made as a result.

Next month we will look at the second principle: understanding change, but the basic building block for any account of value will be your stakeholders.

Accounting for value II: understand what changes

The second principle of accounting for value is to understand what changes as a result of our activities. Going back to our first principle, that stakeholders be involved, it follows that we should be interested in change from the point of view of our stakeholders. This means that stakeholders become people and organisations that change. It means that outcomes become the changes that are a result of an activity. It accepts changes can be positive and negative as well as intended and unintended. It means that we cannot rely on an organisation’s stated objectives as a basis for an account of value created and destroyed. Very often it means that organisations will need to gather evidence of changes that occur after their stakeholders are no longer involved with the organisation.

Take an organisation reporting that beneficiaries have left a training scheme to gain work. If beneficiaries said the change they expected was to get and maintain a job, people trained will not be the change (and not the outcome) that should be measured. The training may be a link in a chain of events that ends up with a job but the organisation will need evidence of how many people reach the point of getting a job. Otherwise there are risks. A risk, for example, that people who get a job, lose it shortly after, even while the organisation reports success.

If stakeholders are involved in describing change then the organisation may have to move away from focusing on easy to measure to harder to measure but relevant outcomes. The organisation will need to develop solutions. For example, while gaining employment is important, increasing self-esteem may be just as crucial and the organisation will need to involve stakeholders in understanding and measuring issues like self-esteem by asking them what it means to them.

Accounting for value III: valuing what matters

It would seem to be stating the obvious to say we should value what matters, but on closer inspection too often we don’t value those things we consider important or only value things that matter less.

The principle of valuing what matters often gets caught up with the use of financial proxies. Financial proxies are a way of representing the value of things in monetary terms, and this is a critical part of SROI, but the value is also reflected in the wider social return on investment account.

Where a financial proxy is important is when it provides a way of revealing values that are important but often not given due emphasis. It allows us to value these important things and bring this value to the table, influencing decisions that are otherwise only based on value that is revealed by market transactions.

It allows us to recognise that resources are being used in order to create value and consider how effectively value is being created and whether our focus is on the right activities.

Value is only half of the principle. The other half is to only value what matters and SROI is designed to focus on what matters. If stakeholders have been involved in considering the value, this will help maintain focus on only valuingwhat matters.

Valuing what matters to stakeholders means all stakeholders, and not relying on values that are relevant and credible to only one – for example a local authority.

It also means being careful to make sure that the way in which you have valued what matters to a particular stakeholder is appropriate for that stakeholder.

Accounting for value IV: deciding what’s significant

When we are reporting on what we do, there is a natural temptation to add more information, to write about great things even when they only represent a small part of our work, to make links where there is little evidence. All this can result in great stories but to be able to see the wood for the trees, keep your audience interested and keep the amount of work you need to do to a minimum, it is important to only include what is ‘material’. But what does this mean?

A material issue is one that will influence the decisions, actions and performance of an organisation or its stakeholders. Materiality comes in two parts. First, the question of whether the information is relevant and second, of whether it is significant. Relevance means that an issue needs to be considered. Significance means that the real or potential impact of the issue (both positive and negative) has passed a threshold that means it influences decisions and actions. An issue can be relevant, judged by reference to a mix that includes stakeholders’ views, social and business peer-based norms, but not significant. In SROI, the analysis of the quantity and value of the outcomes helps assess significance.

Inevitably these are questions of judgement and the principle of materiality is the one where the need to make judgements is most obvious. There will need to be a process in which these decisions are made by reference to a set of criteria.

Judgement is critical. SROI does not provide a tick box approach in which the answers have already been determined and all that is required is for the user to select the appropriate answers. People who come to SROI hoping it will provide an ‘answer’ to the question of ‘what value have I created?’ are disappointed. But this question is not one that readily makes itself accessible to an academic solution, at least not without applying resources beyond the reach of most organisations. What SROI aims to do is help organisations make better decisions than they would if they did not have access to the information provided by SROI. This is the test.

As the body of work in which people are making judgements within the framework of SROI increases, so the range in which judgements are seen as acceptable by those using SROI will become clearer. This will increase the comparability of the results.

But this cannot be determined in a top down approach. There needs to be balance between an assurance process which sets the range within which judgements are acceptable and the experience of those making judgements (informed by decisions made by others). Inevitably the assurance process will change in response.

Accounting for value V: don’t overclaim

So far, we have looked at involving stakeholders, understanding change, valuing what matters and only including what is material in quantifying social return on investment (SROI). This month I will explain the final principle that relates to the analysis of value. It can be summed up as ‘don’t overclaim’ – meaning you should only include the value which your organisation is directly responsible for creating.

This means thinking about two things: what would have happened to stakeholders if the activity hadn’t taken place; and did any other people or organisations contribute to the amount of change that occurred.

Both these will be estimates since is it not possible to go back in a time machine, stop the activity, see what happens and then pop forwards in time to compare this with what actually happened. So, for anyone who is uncomfortable with using estimations this may be a challenging activity.

The alternative, though, is not to estimate and so risk overclaiming. This risk can be significant. It is possible that all the value being claimed would have happened anyway or that someone else is responsible for most of it.

In relation to what would have happened anyway the principle requires reference to trends and benchmarks. So if the outcome is, for example, gaining employment for people who have been unemployed for more than five years, the trend means knowing the rate at which people who have been unemployed for this length of time were able to access employment in the years running up to the start of the project.

The benchmark means also comparing the rate at which people who have been unemployed for this long gain work after the activity with the rate for those people who were not part of the project. This requires choices to be made about which group or groups to benchmark against. More judgments!

It also means being clear about the change. For example, starting new businesses may not lead to an increase in the overall number of businesses. What may have happened is that the number of businesses closing may go up at the same rate, each one being displaced by a new business. There may be other outcomes that are relevant, such as increasing the share of businesses owned by different groups, but there is still no change in the net number of businesses.

This is all fine when there is good information on historical trends and available benchmarks, but for some outcomes this won’t be the case. Perhaps the best you can do is to start building up trend information in the future, identify other organisations to work with on joint benchmarking, and use estimates based on information gained from stakeholders.

These articles were written for Jeremy Nicholls' regular Social Enterprise magazine column Eye for Impact with the first in the series appearin in February this year and the last in the July/August edition. There are two more principles in SROI. However, these relate to the reporting of impact not the accounting.

To learn more visit: www.sroi-uk.org