Accounting Theory: Comparison of the Integrated Accounts of Exxaro and Gold Fields - Literature review Example

Running head: ACCOUNTING THEORY Accounting Theory: Comparison of the Integrated Accounts of Exxaro and Gold Fields The business models of Exxaro and Gold Fields The business model of Gold Fields is based on the need to unlock the value of gold (Gold Fields, 2015). To do so, the company has fashioned its model on four key parts: the inputs, the business processes, the outputs of the business processes and the outcomes of the business process (Gold Fields, 2015). The details of these parts of the business model of the company are described next. Gold Fields requires different types of resources in order to meet the needs of its clients as well as those of its other stakeholders. For instance, since the entire mining industry is dependent on the existence of the mineral resources, the company heavily relies on natural resources for its success. Also, in order for the company to run its operations successfully, it requires financial capital. Financial capital for the company is provided by the individuals who own the shares and bonds that have been offered by the company as well as banks that offer loans to the company (Gold Fields, 2015). Additionally, the company requires different types of resources such as specialized labor, government approval and the goodwill of the communities in which it runs its operations for its success. The operations of Gold Fields take into consideration two important factors: the strategies that are used and the risks that are considered in all the operations of the company. The strategic focus of the company covers different issues such as the need to reduce debt and strengthen the balance sheet, maintain an average rate of dividend payout of 30% of the normalized earnings of the company, and carefully managing the portfolio of the company by divesting non-core assets (Gold Fields, 2015). While seeking to achieve its business objectives, the company takes into consideration different types of risks. The risks that the company seeks to manage arise from uncertainty in the external environment in which the company operates. Finally, Gold Fields uses the cash that is generated from its activities to pay dividends to its shareholders, service its debts, pay its suppliers and employees and invest in different areas that are critical to the sustainability of the business (Gold Fields, 2015). Exxaro is a major mineral mining company in South Africa. The company, which runs different mining operations in different regions in the country, is listed on the Johannesburg Stock Exchange. The business model of the company is made up of two aspects: the processes that the company carries out to deliver value to its stakeholders and the factors that enable the company to successfully carry out the operations and deliver value to its stakeholders (Exxaro, 2015). Essentially, the company carries out different activities as part of its business processes. First, the company runs different mining and mineral processing projects in its different fields and plants. These activities are based on the strategy and portfolio of the company that has been developed over the course of time. Secondly, it is from the different projects that the company extracts and mines different types of minerals. The minerals are then processed and presented to the market. For Exxaro to successfully carry out these processes, it relies on different factors. These factors, which are referred to as ‘enablers,’ are categorized into core enablers, support enablers and leadership and governance (Exxaro, 2015). The factors that are referred to as core enablers include the following: the management of the physical assets of the company, the technology that is owned by the company and how the company approaches the issues of safety, health, environmental and community needs (Exxaro, 2015). The strategies that are employed by the company in its operations, how the company engages with its different stakeholders and the manner in which the company manages its human resources are regarded as support enablers for the success of the company (Exxaro, 2015). Lastly, the success of the operations of Exxaro relies on effective leadership and governance. At Exxaro, leadership and governance is provided by two entities: the Executive Committee of the company and the Board of Management which is led by the CEO (Exxaro, 2015). Stakeholder engagement in Exxaro and Gold Fields Stakeholder engagement is one of the most important concerns of corporations in the current times (Bourne, 2012). Within the context of integrated reporting, companies are required to adopt the integrated reporting framework as a way of effectively addressing the different needs of stakeholders (Integrated Reporting, 2015). Exxaro sought to carry out its stakeholder engagement activities, as indicated in its integrated report for the year that ended on 31st of December, 2014, in different ways. First of all, the company adopted the provisions of the King II report and the requirements of the Accountability AA1000SES stakeholder engagement standard as a basis of its framework for engaging with its different stakeholders (Exxaro, 2015). This was of benefit to the organization in two ways. First, the use of a well established standard helped the company to streamline its stakeholder engagement initiatives with those that are being done by other companies in the industry. Secondly, the manner in which Exxaro engages with its stakeholders was enhanced by the involvement of the company in issues of regulation and community development. In the course of 2014, the senior executives of the company made contact with and engaged local and regional government officials in issues that are related to development (Exxaro, 2015). The purpose of this approach was to enable the company to be at the forefront in helping to drive local and regional development in the areas in which it operates in the country. Thirdly, Exxaro sought to address the needs of its employees and ensure that the employees are comfortable working for it. This was done in several ways. For instance, the CEO of the company engaged in a trip to different units of the company that are located in different regions (Exxaro, 2015). The essence of the trip was to offer the CEO a chance to listen to the grievances of the employees of the company and provide an opportunity for comprehensive and all-inclusive decisions to be made. This approach was particularly important since the employees of the company had engaged in a strike in 2013 (Exxaro, 2015). Because of this, it was particularly important for the senior management team of the company to understand the grievances that the employees had and address them amicably. Gold Fields has also carried out different activities as a way of improving its level of engagement with its different stakeholders. According to the company, all the activities that have been carried out are based on three key issues: inclusivity, materiality and responsiveness (Gold Fields, 2015). The company has sought to ensure that the different interests of its stakeholders are taken into consideration in all its activities. In addition to this, the approach of the company towards stakeholder engagement has been based on the need to remain responsive to the emerging issues in its business environment. In 2014, the company carried out direct and indirect engagement activities with its different stakeholders (Gold Fields, 2015). Dialogue sessions, discussions and direct participation in community events were some of the ways in which the company directly engaged with its stakeholders. As well, the company observed specific standards in its operations. Basically, the standards that the company has sought to adhere to are those that have been developed to help business organizations effectively manage the environment (Gold Fields, 2015). By adhering to those standards, the company seeks to meet the expectations of the society. What is important to note is that in seeking to improve its engagement with stakeholders, Gold Fields has attempted to collaborate with different stakeholder groups. For instance, the company sought to ensure that all its employees are fully engaged in its activities. This was done by addressing all the needs of the employees of the company. Additionally, the company sought to collaborate with the local and national governments by ensuring that it meets all the standards and other forms of requirements that have been established. Lastly, the company has sought to participate in different community activities in the areas it operates. By doing so, the company seeks to participate in the social and economic development process of the community. Trade-offs between different types of capital in Exxaro and Gold Fields Exxaro sought to achieve trade-offs between the six different types of capital of the company (Exxaro, 2015). The following is a description of the three most important trade-offs between the six types of capital that the company carried out. First, the company sought to achieve operational and financial excellence (Exxaro, 2015). Operational and financial excellence was an important objective that was pursued by the organization. This was carried out in the form of development of Grootegeluk Medupi Expansion Program (GMEP) (Exxaro, 2015). By undertaking this project, the company sought to increase its manufacturing capacity as well as its level of operational efficiency. On the other hand, investment in the project reduced the amount financial capital of the company that is readily available for use. Second, the company invested in an expansion program of its core coal business (Exxaro, 2015). This activity reduced the amount of financial capital in the company that is available for use. However, it increased the value that the company offers to its shareholders. Therefore, by investing its financial resources in a program that sought to expand the coal business of the company, a trade-off between two different types of capital was achieved. Lastly, Exxaro sought to improve its overall portfolio. By improving its portfolio, the company sought to achieve a trade-off between its natural capital and its financial capital. Improving its portfolio meant that the company makes important purchases. By purchasing and developing different mining fields, the company reduced its financial capital. However, the purchasing of different fields to add to the portfolio of the company led to an increase in the level of natural capital that is under the control of the company. Similarly, Gold Fields sought to strike a balance between its different types of capital during the financial year that ended on 31 December 2014. To begin with, the company streamlined its list of projects (Gold Fields, 2015). Streamlining the portfolio was done as a way of achieving different objectives. For instance, it was done as a way of reducing the number of projects that the company is running. Reducing the number of projects was done to help the company avoid investing in projects that are not suitable for its own profitability. By streamlining its projects, Gold Fields sought to increase the value of its human capital while at the same time increasing the capacity of the market price for its products. On the other hand, increasing the value of the products that are offered by the company translated into an increase in the value of the shares of the company. Therefore, a simple act of selling off assets that are not core to the operations of the company had the effect of changing the values of the different types of capital of the company. Investing in community socio-economic development initiatives was a trade-off between the financial capital of the company and the company’s reputation within the community (Gold Fields, 2015). Basically, the company sought to increase its level of reputation. However, engaging in community-based activities cost the company financial resources. Therefore, the manner in which Gold Fields engaged in community-based activities underscored the way in which the company obtained a trade-off between the two forms of capital at its disposal. Differentiating human from social capital in Exxaro and Gold Fields There are several ways in which Exxaro differentiates human capital from social and intellectual capital. These are as follows. To start with, the company views social capital as the sum total of the resources that are at its disposal as a result of the manner in which it relates with its different stakeholders. Social capital arises from the positive relationships that the company is able to cultivate with the society in which it operates. With regard to this, the company seeks to demonstrate a high degree of responsibility and accountability (Exxaro, 2015). Responsibility means that the company seeks to meet all the needs of the society in which it operates while accountability means that the company seeks to remain answerable to specific issues that arise from its relationship with members of the society in which it operates. On the other hand, the human capital of the firm is regarded as the result of the human resource development activities that are carried out by the firm. The importance of the human capital of Exxaro is seen in the manner in which the firm seeks to achieve operational and financial excellence as a result of the input of its human resources. Lastly, the intellectual capital at Exxaro is viewed as the sum total of all the skills that individuals within the firm have managed to accumulate over the course of time. The knowledge and skills are important to the organization since they are used to shape the leadership and governance approaches that is used within the firm. The success of Gold Fields is ascribed to the manner in which the company has been able to effectively utilize its six different types of capital to achieve its objectives over time (Gold Fields, 2015). More specifically, the company has succeeded because it has been able to differentiate its human capital from its social and intellectual types of capital. The manner in which the company has differentiated its social capital from intellectual and human capital has occurred in several ways. First, the intellectual capital of the company is seen in the form of the different skills, knowledge and understanding that its employees have (Gold Fields, 2015). The knowledge and skills are used to contribute to the overall business processes of the company. This is because the skills of the employees are relied upon to help the company deliver its mandate in relation to the different needs of its stakeholders. On the other hand, the company places high value on social capital (Gold Fields, 2015). Simply put, social capital is the consent that the company gets from the society to run its operations. The company runs its operations in different locations distributed across different regions in the world. In all these locations, the activities of the company have different types of effects on the society. Therefore, for the company to successfully run its operations, it is necessary for the different societies in which it operates to grant it the license to do so. Therefore, social capital is an important type of capital for the company. The importance of social capital to the company is seen in the manner in which the company seeks to establish and maintain positive relations with the members of the different societies in which it operates. Lastly, human capital in Gold Fields is seen as the sum total of all the human resource practices that are carried out within the organization. The organization is made up of different types of employees who have different types of skills and expertise (Gold Fields, 2015). The skills and expertise of the employees are used to help the company execute its business strategies in its operations. This makes it possible for the company to achieve its strategic objectives over time. Value creation in Exxaro and Gold Fields According to Ernst &Young (EY) (2013), value creation within the context of integrated reporting takes into account different things. For instance, it is noted that the way companies create value within the context of integrated reporting covers the financial as well as the non-financial aspects of the business (EY, 2013). Also, it is noted that the manner in which a company creates value relies heavily on how interconnected the different aspects of its business operations are (EY, 2013). Similarly, PwC (2015) notes that the concept of value creation for companies within the context of integrated reporting means the extent to which a company makes positive returns for its stakeholders. The extent to which the two companies create value can be determined by considering their performance in terms of four areas: finances, people, business operations and the society. When the manner in which the two companies perform is evaluated in terms of these issues, it can be seen that Gold Fields creates more value than Exxaro. This is explained in detail as follows. In terms of finances, Gold Fields seems to be performing better than Exxaro. For instance, Gold Fields has managed to increase its share price considerably over the last one year (Gold Fields, 2015). Further, the company has managed to reduce the proportion of debt financing over the last year (Gold Fields, 2015). These two approaches of increasing the share price and reducing the amount of debt financing that the company uses has helped Gold Fields to deliver to its shareholders value that is higher than what Exxaro offers. The second issue that can be used to determine how well a company creates value is the state of its business operations. It should be noted that both companies have sought to optimize their business operations over time. The need to optimize business operations has been borne out of the realization that it is only when an organization is efficient that it is able to achieve its objectives easily and fast. In this case, Gold Fields has sought to optimize its operations by addressing three key issues in its business: the safety of its employees, the quality of its assets and the rate of growth of its business operations (Gold Fields, 2015). Exxaro has also focused on the same issues as a way of helping it create value. This has been seen in the manner in which the company has sought to streamline its asset base across the world as well as address health and safety concerns in all its establishments (Exxaro, 2015). However, Gold Fields has been more effective in achieving its objectives with regard to optimizing business operations as compared to Exxaro. Therefore, in the broadest sense of the word, Gold Fields created more value than Exxaro during the financial year that ended on 31st December 2015. References Bourne, L. (2012). Stakeholder relationship management: A maturity model for organizational implementation. London: Gower Publishing Limited. Ernst & Young (EY) (2013). Value creation: Background paper. Retrieved from http://integratedreporting.org/wp-content/uploads/2013/08/Background-Paper-Value-Creation.pdf Exxaro. (2015). 2014 integrated report. Retrieved from http://www.exxaro.com/ar/2014/Exxaro_IR_2014.pdf Gold Fields. (2015). Integrated annual report for the year ended 31 December 2014. Retrieved from https://www.goldfields.com/reports/annual_report_2014/integrated/pdf/full.pdf Integrated Reporting. (2015). Why the need for change? Retrieved from http://integratedreporting.org/why-the-need-for-change/ PwC. (2015). Integrated reporting: Where to next? Retrieved from http://www.integratedreportingsa.org/Portals/0/Documents/PwCIntegratedReportingSurvey.pdf Read More