VALUE CREATION IN 2014s ANNUAL REPORTS

I.

INTRODUCTION

A company can create or destroy value through the processes, tools, technologies and
innovation it proposes to its stakeholders. In this way, all the local communities, customers
and the business partners are directly influenced. I think at the base of every activity of value
creation is the business model of the companies, defined by IIRC as the chosen system of
inputs, business activities, outputs and outcomes that aims to create value over the short,
medium and long term.
This brief research has two purposes: to study the business model for several companies and
the main stakeholders that could benefit from it in order to find out the strategy used for value
creation and to assess how those companies creates value for the main category of parties
connected with their activity which are the customers.
For the objectives aforementioned I have analyzed the annual report of the next five
companies HSBC Holdings plc, FMO, ACHMEA, SHIPOL and RSA and I have finished the
project with some conclusions.

II.

THE CONCEPT OF VALUE CREATION

VALUE CREATION represents, together with the capitals, a part of the international <IR>
framework named the fundamental concepts. The value creation is defined as follows: Value
is created through an organizations business model, which takes inputs from the capitals and
transforms them through business activities and interactions to produce outputs and outcomes
that, over the short, medium and long term, create or destroy value for the organization, its
stakeholders, society and the environment.(IIRC)
With other words, value is created, changed or destroyed though an organizations business
model: the capitals (financial, manufactured, intellectual, human, social and relationship and
natural capital) are stores of value from which value is released when the capitals are
combined, transformed and leveraged to produce outputs and outcomes, resulting in value
creation or value destruction.
Integrated reports should communicate information that enables intended report users to
assess whether, and to what extent, value has been created and is likely to be created for the
organization, so as to add to financial value. In addition, it must explain how the business
model affects whether, how and to what extent value has been created or destroyed for others,
so as to increase or decrease the pool of capitals on which the organization can draw to create
value over time given planetary limits and societal expectations.
1

Information that is likely to facilitate an assessment of whether, and to what extent, value has
been created or destroyed includes:
A description of the business model including inputs, business activities, outputs and
outcomes and links to the organizations strategy. The relationship between the
business model and the organizations strategy helps to explain the context, direction
and focus for the business model;
Performance Whilst not sufficient alone for an assessment of value creation,
performance contributes to an understanding of the extent to which a company has
created value from achievement of performance goals;
What type of value the organization intends to create, how, for whom and why
including the organizations notion of value, the process that is used for value
creation, what actions and activities the value creation process entails, for whom the
organization aims to create value and why.
Managements assessment of whether the intended value has been created, that is,
whether the outputs and outcomes from the business model are as intended according
to the organizations strategy and targets;
Governance Information about the stability of the organizations governance
structure helps intended users to assess its resilience against short term disruptions so
as to continue to create value;
Innovation and future outlook, including the measures taken, and research in which,
the organization has invested to innovate so as to ensure the resilience and efficiency
of the business model for value creation over time. This will include managements
view of the anticipated effect on financial and other types of value of their policies,
decisions and innovations;
The external context in which the organization operates An overview of the external
policy, regulatory, societal and environmental context in which an organization
operates, the opportunities and risks it faces and how it responds to the external
context is important for assessing the resilience of an organizations value creation
mechanism;
Connections Value is created or destroyed by organizations from connections
between a wide range of factors including business activities and the wider system
and context in which they operate, including planetary limits and societal
expectations.
III.

METHODOLOGY

My study is based on analyzing the value creation in annual reports published in 2014 for the
next five companies: HSBC Holdings plc. FMO, ACHMEA, SHIPOL and RSA.
I
downloaded
the
respective
documents
from
the
website
http://examples.integratedreporting.org/home. In the following paragraph I realized a brief
description of them:

Achmea is the largest insurance company in the Netherlands and has a cooperative identity
and history built on brands such as Centraal Beheer, Interpolis, etc. Achmea and Pro Life
collectively serve approximately 11 million customers in the Netherlands. In addition, it also
operate in Greece, Turkey, Slovakia and Ireland and have a partnership with Rabobank in
Australia. IT offers to their Dutch customers a complete range of insurance products and
related financial products through the banking, direct and brokerage distribution channels. In
both the Dutch and international markets, is focuses primarily on non-life,life & pension and
health insurance. As a non-listed insurance company, Achmeas key focus is ensuring longterm services for its customers.
RSA is an insurance company that offers a wide range of personal lines products including
motor, home, travel and pet all of which can be purchased either directly, through a broker
or via an affinity partner. They have major operations in the UK, Scandinavia, Canada,
Ireland, Asia and the Middle East, Latin America and Central and Eastern Europe and the
capability to write business in around 140 countries.
HSBC is one of the world's largest banking and financial services organizations. With around
6,100 offices in both established and emerging markets, it serves around 48 million customers
through four Global Businesses: Retail Banking and Wealth Management, Commercial
Banking, Global Banking and Markets, and Global Private Banking. Its network covers 72
countries and territories in Europe, Asia, the Middle East and Africa, North America and Latin
America. It is listed on the London, Hong Kong, New York, Paris and Bermuda stock
exchanges, shares in HSBC Holdings plc are held by about 213,000 shareholders in 131
countries and territories.
FMO is the Dutch development bank. It operates primarily from their office in The Hague in
The Netherlands and has a local office in Johannesburg, South Africa. It has investments in
more than 85 developing countries, offering to their clients a variety of financial products, as
well as expertise and access to its networks. Their investments are mainly focused in three key
sectors: Financial Institutions, Energy and Agribusiness. Alongside partners, FMO has also
invested in the Infrastructure, Manufacturing and Services sectors.
Schiphol Group is an enterprise that operates airports in the Netherlands, conducts
international activities and participates in airports abroad. Operating Amsterdam Airport
Schiphol is the Group's largest activity. Schiphol Group is the owner and operator of
Rotterdam The Hague Airport and Lelystad Airport, and holds a majority share in Eindhoven
Airport.
Taking into consideration the requirements in International Integrated Reporting framework, I
formulated the next research questions for measuring some of the qualitative characteristics of
value creation:

Q1) How description of the business model is linked to the value creation?
Q2) Which are the most important stakeholders for whom the company creates value?
3

Q3) How a company creates value for its clients?

Q4) How management asses of weather the intended value regarding their clients has been
created?
IV.

RESULTS OF THE RESEARCH

Regarding the research question no. 1, How description of the business model is linked to
the value creation?, I have chosen to analyze in contrast the business model of those five
companies. Even more specific, I have tried to identify the chosen system of inputs, business
activities, outputs and outcomes that aims to create value over the short, medium and long
term (the definition of the business model gave by IIRC).
For the first company, ACHMEA, the most representative schema of the business model that I
found within the annual report is the Stakeholder Value Management Model. The figure
explains how the inputs (the capitals of the shareholders, the distribution channels of the
partners, the professionalism&commitment of the employees and the premiums&customer
participation) enter into the trust and cooperate and what are the outcomes or the value created
for each part who was contributing in the first phase, respectively: the dividends for the
shareholders, the range of financialproducts&services for the partners, the income&personal
development for the employees and the security&financial safety net for customers.
RSA presents the inputs and outputs using quantitative data. The inputs are financial and
operational: 4 core regions, 5,2bn pounds capital employed and 19 thousands employees. The
outputs include: 7,5bn pounds net written premiums, 2,9bn pounds of tangible net assets,
14.2bn investment assets, c.80% customer retention and 12-15% target underlying return on
tangible equity. As we can see, the annual report present directly the value added calculated.
For HSBC Holdings plc I did not found in the business model precisely the inputs which are
contributing to the value creation, but I could identify the outputs for each party involved in
the banks activities: salaries and variable pay for the employees, dividends for shareholders,
taxes for the governments, infrastructure for the third parties and products (loans, deposits,
financial services) and income (interest, fee income, trading) for customers.
The business model of FMO is structured a little bit different in comparison with the previous
two companies. It is focused more on emphasizing the inputs and the activities that generates
the outcomes and less on the exact categories of stakeholders which are connected with FMO.
The inputs used for value creation are: (knowledge&skills, networks&partnership,
capital&funding, compliance&risk management), the specific actvities wich lead to the
outcomes are: financing&investing, overnment fund management, commercial fund
management and syndicated loans). And, finally, the outcomes realized: financial
sustainability, client satisfaction and development impact.
In contrast with the companies already presented, SHIPHOL chose to present in the Annual
Report the specific inputs and outputs grouped by categories of capital. I presented them in
the next table:
4

Capital

Input

Output

Produced

Airport infrastructure
Buildings
Car parks
Roads
Stakeholder dialogue
Collaborations

High-grade facilities and

infrastructure
Competitive airport charges
Attractive real estate
Relationships with sector
partners, business partners,
suppliers and employees
Local support base
Skilled
and
trained
employees
Diversity
Safe working conditions
Brands and concepts
Innovation
Emissions
Noise
Material use and waste
Waste water
Surface water
Space requirements
Biodiversity
Return
Credit rating
Taxes
Dividend

Social and relationships

Human

Employees
Schiphol workers

Intellectual

Knowledge
Expertise
Energy
Raw materials
Drinking water
Land holdings

Nature

Financial

Financial position
Creditworthiness

To address the research question no. 2 Which are the most important stakeholders for whom
the company creates value?, I realized the following table. It contains the categories of
stakeholders from the Annual Reports stated to be the direct beneficiaries of the value
creation:

ACHMEA

RSA

Shareholders
Partners
Employees
Customers

Shareholders
Customers
Society
Employees

HSBC
Holdings plc
Shareholders
Governments
Third parties
Employees
Customers

FMO

SHIPHOL

Shareholders
Partners
Employees
Clients

Travellers airlines
Local residents
Sector partners
Government bodies
Financial stakeholders
Business partners
Employees

As we can observe from the previous table, the companies that I chose have in common most
of the stakeholders: shareholders, partners, employees and customers. It is possible that some
of stakeholders (for example the Government) who dont appear in the Annual Report of
ACHMEA for example, to have influence for the company but it is not a material one and
thats why it is not presented.
For answering the question no. 3, How a company creates value for its clients? I extracted
from the Annual Reports of the companies the statements which explain the process of
realizing value for them. It is reasonable to expect that the value creation is different because
they operate in distinct fields of activity.
ACHMEA provide its customers with the security that they can continue living their lives
after being faced with unexpected setbacks. The company absorbs the risk of such setbacks
from them if these risks become so substantial that they are unable or unwilling to bear it
themselves. Since their customers pay premiums in a cooperative context, ACHMEA can
offer them continuity when facing unexpected adversity. Insurance is based on the principle of
solidarity, which means that, although all individual policyholders pay premiums, not all of
them will suffer actual loss. The impact on individual policyholders will therefore remain
manageable due to the shared risk.
Every day RSA insures millions of customers families, cars, houses, and pets across the
world. In doing so, they provide to their customers with the peace of mind that if the worst
happens they will be able to rely on RSA to help. The companys products and services help
to reduce risk and make communities safer places to live, work and travel. Motor insurance is
a substantial part of their business and they have a clear commercial interest in making the
worlds roads safer. From promoting telematics to running road safety campaigns, they
provide incentives, advice and guidance to customers and the general public to promote safer
motoring for all users. They hold capital to protect policyholders from the risks they take
within their investment portfolio as well as to protect against volatility in our underwriting
performance.
HSBC Holdings plc. provides a facility for customers to securely and conveniently deposit
their savings. It allows funds to flow from savers and investors to borrowers, either directly or
through the capital markets. The borrowers use these loans or other forms of credit to buy
goods or invest in businesses. By these means, the company helps the economy to convert
6

savings which may be individually short-term into financing which is, in aggregate, longer
term. HSBC brings together investors and people looking for investment funding. It develops
new financial products. It also facilitates personal and commercial transactions by acting as
payment agent both within countries and internationally. It finances importers and exporters
engaged in international trade and provide advances to companies secured on amounts owed
to them by their customers. HSBC also offer additional financial products and services
including broking, asset management, financial advisory services, life insurance, corporate
finance, securities services and alternative investments.
FMO only takes on projects where they are additional to the market. They support
investments that are expected to produce strong economic, social and environmental returns to
society as a whole, but where the perceived risks are such that they attract insufficient
commercial interest. As a catalyst financier, the company accepts a relatively high share of the
risk involved, giving other financiers the space and comfort to co-invest with them. Once they
are willing to take over their investment role, they move on to other high-risk projects or
countries. They arrange syndicated loans by bringing together commercial banks, investors
and other development finance institutions (DFIs), with FMO structuring the financing. This
enables us to provide our clients with increased access to finance and more diversified
lending, while giving their financial partners efficient opportunities to enter new markets.
FMO actively seeks out clients and projects that have high potential for positive impact in all
spheres of development beyond just economic growth.
Schiphol Group creates value by connecting the Netherlands and increases prosperity and
well-being in this country and elsewhere. The passenger and cargo transport processes
constitute an airport's value chain. An airport provides infrastructure and facilities for
departing, transferring and arriving passengers and cargo, and for the businesses involved in
this process. In addition to being a multimodal hub, they are an attractive marketplace for
products and services and offer a wide range of location options for businesses. A large
number of parties are involved in the passenger and cargo transport processes. As an airport
operator, Schiphol Group is responsible for these processes. Airports do not always have
complete control of the performance results; this is a shared responsibility of multiple parties.
A runway incursion can, for instance, occur as a result of an incorrect act by a Schiphol
employee or by an airline, LVNL or handling agent employee. The decreasing number of
runway incursions is a good example of the joint efforts undertaken by all parties concerned.
The airport is responsible for providing the facilities required to ensure the proper handling of
air traffic and the associated passenger and cargo transport at the airport.
For the last question, How management asses of weather the intended value regarding their
clients has been created?, I proceeded to the examination of Chairmans letter from the
beginning of every Annual Report.
For Achmea, Wilem van Duin, the Chairman of the Executive Board, states that the Comany
created value for their clients in 2014 by improving the digital communication between the
two parts: apps on smartphones, presence in social media and also by offering a customer
council for every brand.
Stephen Hester, the Group Chief Executive of RSA gives a short statement about how they
create value. More exactly, in this volatile and competitive market, they use a balance of
geography, customer, product and distribution channels. For them, the customers are like
lifeblood.
7

Stuart Guliver, the Group Chief Executive of HSBC Holdings plc, reveals that they created
value for their clients by increasing the flow of commerce between Asia, Europe and North
America. For him, the best way to prove this is by presenting the main awards that company
received during 2014: best global trade finance bank and best trade finance bank in MENA in
the Global Trade Review Leaders in Trade Awards, the best global cash management bank
the 3rd successive year in the Euromoney Cash Management Survey, number one for debt
capital markets in our home markets of the UK and Hong Kong, and number one for Equity
Capital Markets in Hong Kong by Dealogic, etc.
Nanno Kleiterp, Chief Executive Officer at FMO wrote a brief letter addressed to
stakeholders, with short statements about the value created for their clients. He mainly talks
about promoting investments by other investors in their clients, promoting investments of
Dutch Companies in developing countries and supporting the clients that have a long business
strategy. I think his declaration is not very clear and specific, but it is oriented more to
strategy than to result achieved in 2014 but at least reveals sustainability.
Jos Nijhuis, President & CEO of Schiphol Group, confesses that the connectivity is the main
value that Shipol Airport can provide for its clients. Schiphol connects the Netherlands.
Schiphol's connections facilitate international trade and enhance the appeal of the Netherlands
as a business location for foreign companies. Connectivity similarly embraces a social
component. Schiphol enables people to meet and to create social networks not only from
distant corners of the globe but also from close by. Connectivity equally means respecting
people, the environment and the local community. Amsterdam Airport Schiphol must remain a
hub airport if it is to maintain its connective power.
V.

CONCLUSIONS

Within this project I have tried to analyze how the next five companies: ACHMEA, RSA,
HSBC Holdings plc., RSA and SHIPO present the concept o value creation in their Annual
Reports from 2014. The resume of the answers from the questions in the methodology can be
resumed as follows:
- The business model of the previous companies mostly contain the inputs and the
outputs of their activity, excepting RSA which dont present the inputs precisely;
- The companies that I chose have in common most of the stakeholders: shareholders,
partners, employees and customers. It is possible that some of stakeholders (for
example the Government) who dont appear in the Annual Report of ACHMEA, to
have influence for the company but it is not a material one and thats why it is not
presented;
- Achmea and RSA, insurance companies, create value for their customers by providing
them with the peace of mind that if the worst happens they will be able to rely on them
and by sharing the risks of individual policyholders. HSBC Holdings and ACHMEA
support the investor outside and inside their countries. Schiphol Group creates value
by connecting the Netherlands and increases prosperity and well-being in this country
and elsewhere;
- The examination of Chairmans letter from the beginning of every Annual Report gave
me the feeling they contain the next key words: digital communication and customer
8

support for ACHMEA, a balance of geography, customer, product and distribution

channels for RSA, international partnership and recognition for HSBC Holdings plc.,
international partnership and strategy for FMO and connectivity for Schiphol Group.

VI.

REFERENCES

1)
2)
3)
4)
5)
6)

The Annual Report of 2014 for Achmea;

The Annual Report of 2014 for RSA;
The Annual Report of 2014 for HSBC Holdings plc.;
The Annual Report of 2014 for FMO;
The Annual Report of 2014 for Schiphol Group;
http://integratedreporting.org/wp-content/uploads/2013/08/Background-Paper-ValueCreation.pdf;
7) http://www.ey.com/Publication/vwLUAssets/The_concept_of_value_creation_in_Inte
grated_Reporting/$FILE/EY-the%20concept-of-value-creation-in-integratedreporting.pdf.