3.
What is the role of data in organisations?

3.1 Introduction

We acknowledge that the term ‘stakeholder’ is increasingly contested due to its colonial connotations, and we seek to limit its usage. Please read the blog Should we stop using the word stakeholder in research? for more details about the term.

Data plays a crucial role in maintaining critical business relationships with the range of individuals or organisations who have some involvement or interest in the successful running of an organisation. There is a wide range of such people, usually and collectively referred to as stakeholders or – preferably – interested parties.

The importance of these interested parties to an organisation differs, and therefore the organisation may choose to engage with them in different ways, typically prioritising those who have the greatest potential impact on the success of the organisation. For example, organisations tend to prioritise those parties who provide finance to them, in the form of share capital (shareholders), loans/debt (such as banks) or, in the case of not-for-profit organisations, donations and gifts from donors. This is because without their continuing willingness to provide such financial support, the organisation would not be able to continue to exist. However, the organisation must also consider other interested parties, such as customers, suppliers, employees, the government and the wider community and environment.

One of the ways in which organisations engage with interested parties is by providing them with data about the organisation to inform them about what is happening over time. Although organisations typically make a lot of data available to interested parties, they may use only some of it or not use it at all.

This unit will look at what data is and what makes it useful to different interested parties, particularly in decision-making, and explore not just the importance of financial data but the often more critical non-financial data. It includes a discussion of the level of assurance these measures provide to interested parties, in both for-profit and not-for-profit organisations.

3.2 What is data?

Data is basic facts, figures or statistics collected and stored for a variety of purposes. Most often, there needs to be some processing, organisation or analysis of the data for it to be useful or understandable to the recipient, and allow them to assess the potential impacts or implications of the data.

When data is analysed or organised to derive useful insights or understand a particular subject, it is usually referred to as ‘information’, although often (and confusingly) the terms are used interchangeably.

Data can take various forms, such as:

• numbers
• text
• images
• audio files
• video files.

It can be structured, for example in:

• tables
• graphs
• databases.

Structured data is often easier to analyse more quickly by using tables, database queries or charts, but unstructured data often provides additional information in a different way to add a wider range of insights into an issue, for example, through images or audio.

An organisation may present a table of figures (structured data) to its investors, which provides them with a level of understanding about the performance of the organisation, but a video presentation (unstructured data) from the chief financial officer might explain why the figures are the way they are and what happened in the market during the year, which the table of figures may not so easily show. Both forms of data provide investors with useful information, but together they present an in-depth picture of the performance of the organisation.

Data can also be described as either qualitative or quantitative.

• Qualitative data (also referred to as categorical data) comprises information which is non-numerical in nature. It is often based on the interpretation of something, for example, an account of how the economy has affected an organisation. It is usually descriptive and subjective, which means different people could produce different accounts of the same things.
• Quantitative data (also referred to as numerical data) is based on figures, and is usually countable and measurable, for example, the amount of money which has been spent in an organisation each year. Quantitative data is usually analysed using calculations such as statistics or ratios.

We use both qualitative and quantitative data to help us understand and interpret what is happening around us, whether in our personal or professional lives, and it can help us make decisions about a course of action, such as whether to invest or withdraw money, to purchase or sell something, to carry out an activity or not, to change our mind about something, or to find out more information before making an immediate decision.

3.3 What makes data useful?

If we reflect on the sort of data or information that we use daily, how do we decide whether it is useful for our purposes?

In accounting, the International Financial Reporting Standards (IFRS) Conceptual Framework focuses on how information is made available to financial statement users. It states that information is useful when it supports users in making decisions about providing resources to the organisation. These resources are usually financial, as is the case with shareholders and loan providers, but they could also involve providing labour in the case of employees, continuing patronage as a customer, or credit facilities as a supplier.

What sort of information is useful and what makes it useful?

Existing and potential investors, lenders and other creditors require information about the economic resources of the organisation, claims on those resources and any changes in those resources and claims. They also need to understand how efficiently and effectively the management and board have exercised their responsibilities in using the organisation’s resources.

Other users, such as employees, may want to understand how stable the organisation’s finances and potential for growth are.

Some users may also want to understand more than just the financial data – they may wish to know more about the business model of the organisation, and its environmental, governance and social responsibility performance.

• Relevance. To enable interested parties to assess information, it needs to be useful to the decision-making process, which means it can make a difference in that process. It can do this if it has predictive value, confirmatory value or both.

‘Predictive value’ means it can be employed by a user to predict what might happen in the future, for example using the previous year’s sales figures as a guide to what the sales figures might be in the future.

‘Confirmatory value’ means that the data provides evidence which confirms or changes previous outcomes or estimates, such as using actual sales data to confirm or change a previously estimated budget or forecast.

Data also needs to be material, which means that if it were omitted or misstated, it would potentially influence the decision a user might make. Materiality can either be related to size of a transaction or the nature of it. For example, a £100 stationery bill is not material in an organisation with a turnover of £1 million, whereas a £500,000 labour cost is. Equally, it is material to understand the level of bank balances, directors’ remuneration, pending lawsuits and events which might cause default in a banking or borrowing covenant, irrespective of the size of these items.

• Faithful representation means that information provided, either in figures or in words, represents the true nature of the economic situation or substance of the organisation. Usually, this can mean the legal form of a transaction – such as a contract. However, it can also mean how the transaction reflects what the organisation is doing.

For example, listing the non-current assets on the statement of financial position based on legal ownership of those assets represents the legal status of those assets. However, if the organisation uses assets which it leases – but does not own – in its everyday business and the existence of those assets were omitted from the financial statements, they would not faithfully represent how the organisation generates its income or runs its business. For this reason, leased assets are shown in the statement of financial position, where they are usually referred to as ‘right-of-use’ assets. This clearly differentiates them from owned assets, as the organisation cannot pledge them to raise financing because it does not legally own them. Through a lease agreement, however, the organisation has the right to use them for a specific purpose and for a specific duration.

There are other criteria which make information useful and reliable, in that interested parties can trust it to make decisions. This category includes completeness, in that the organisation should not omit data or information to mislead users. It should also be free from error. This does not mean information has to be perfectly accurate (as very often estimates are made when presenting information, particularly in situations of uncertainty), but that there are no errors or omissions in the description of transactions and that the process used to report information was applied without error. This means, for example, that when making an estimate it should be clear that it is an estimate, how it was developed and that the process for doing so is appropriate.

Information provided should also be neutral, in that the organisation should not depict it in a biased way, although this needs to be balanced by a degree of prudence which is the application of caution when making judgements about information when conditions may be uncertain. For example, members of an organisation’s management may have a natural bias to show their information in a positive, optimistic light, so that they can improve their reputation in the eyes of their shareholders. By countering that bias and ensuring that income and assets are not overstated and expenses and liabilities are not understated, a neutral and prudent depiction of the organisation’s financial performance and position can be provided. Prudence can also ensure that they do not build up reserves or excessive provisions to manipulate the underlying performance of the organisation.

Other characteristics of information can enhance the usefulness of that information. This includes:

• Comparability, by which information about one organisation can be compared with similar information about another organisation – or with the same organisation over time. Comparability can be achieved by applying the same or similar methods for transactions consistently, across time periods and across organisations.

• Verifiability of information helps assure users that the information provided faithfully represents the underlying transactions or events. It means that different knowledgeable and independent people could reach a consensus that the information does provide a faithful representation, even if not completely in agreement in all aspects. For example, when reporting estimates, there is often a range of outcomes which could all equally represent the underlying transaction or event. Provided there is agreement or consensus that the information given falls within that acceptable range, it would be considered verifiable.

• Timeliness means that the information should be available to users in time to be able to influence their decisions. This characteristic has improved with the quicker availability of data and information on the internet in recent years.

• Understandability means that information should be presented clearly, concisely and consistently and is comprehensible to users who have a reasonable knowledge of business and economics. It does not mean that organisations can omit information which is complex just to make their reports more understandable; users can seek the assistance of a specialist to help them understand more complicated information, if necessary.

3.4 Who uses organisational data?

After considering what makes information and data useful in the previous section and the key interested parties in organisations we mentioned in the introduction, we will now discuss each interested party in more detail. We will look at the information each is likely to expect from organisations when making decisions.

To illustrate the kind of information produced by for-profit organisations, we will use BP plc, a global energy company, as a case study; for not-for-profit organisations, we will use the information provided by the British Heart Foundation (BHF), a large not-for-profit organisation in the healthcare sector.

While there are many different interested parties who may use organisational data and information for a variety of purposes, we will focus on the key groups:

• finance providers (shareholders, loan providers, donors)
• customers (including service users or charitable recipients)
• suppliers
• employees (including ex-employees, such as pensioners)
• community
• government, including tax authorities

What do each of these groups want to know about an organisation? In the following sections, we will focus the different needs of interested parties from for-profit organisations as well as not-for-profit organisations.

3.4.1 For-profit organisations

Providers of finance

Shareholders

For profit-making organisations, the main finance providers are shareholders or investors, who buy shares in the organisation in return for dividends and/or increased share prices in the future.

For smaller firms, these shareholders are most likely to be the person or people that established the organisation. They are also referred to as ‘owner-managers’ when they are not only the owners of the business but also involved in the day-to-day running of the business.

When the owner or shareholder of a business does not get involved in the running of the business and hires other directors or managers to run the business on a day-to-day basis instead, we say that there is a separation of ownership and management, which forms the basis of ‘agency theory’.¹ When this happens, those who make up the business’s management (referred to as the agents in the relationship) may have different goals to the owner(s) (who are referred to as the principal(s)), as those in management may take the day-to-day decisions that might benefit their own interests, rather than those of the owners. To reduce the potential negative effects of this, those in management report what they are doing. It is also common that some restrictions are placed on what they can do (certain decisions can only be made by the shareholders, for example) and their remuneration can be tied to achieving goals which are believed to be in the shareholders’ interests.

The members of the management have access to all internal information about the organisation, and they decide how much information is made publicly available – unless it is a legal requirement, such as, for example, the publication of annual reports and tax returns. Much of this internal information is commercially sensitive, which means organisations do not want competitors to know about it, but this means that investors who are not involved in the day-to-day running of the business do not have access to all this information. This phenomenon is called ‘information asymmetry’, as there is an imbalance of information between people internal to the organisation and those external to it.

Does this matter? As we noted, for information to be useful, it should be relevant and faithfully representative of what is happening in the organisation. Therefore, as long as those in management do not intentionally hide information which could change an investor’s decision to buy, sell or hold their investment (in shares, for example) or to vote on board appointments, or use their internal knowledge for their own gain (to buy or sell shares knowing something other investors do not, which is called insider trading), then information asymmetry is usually not a problem.

When deciding about investing in an organisation, an investor must also consider their attitude to risk (whether they are comfortable with some risk in the hope of higher returns, or are more risk-averse, which is likely to result in receipt of a lower return). For example, newly established organisations tend to be riskier because many new businesses fail, but there is more opportunity for growth, so they could provide higher returns (particularly in share price appreciation, although in the early years they may not pay dividends) if they survive and expand. Older, larger organisations tend to be more stable and offer more stable dividends but perhaps lower share price appreciation.

So, what information do shareholders want and why?

Financial information

Shareholders want to know whether they should retain, sell or buy more shares in the organisation.

They also want to understand how they will get a return on the money they have invested; this could be either through the share price increasing, so that they could sell their shares for a higher price than they paid, or through the receipt of dividend payments from the organisation, or a combination of both.

To do this, they will want to focus on trends in the financial results of the organisation, such as those relating to:

• income
• expenses
• assets
• liabilities
• equity
• efficient use of resources, such as capital and assets
• cash or liquidity positions.

To do this, they will look at the income statement and statement of financial position for key information about the financial performance and financial position of the organisation. In addition, shareholders may also look at the other financial statements, such as the statement of cash flows or the statement of changes in equity, and the notes to the financial statements, as these provide additional information about how the figures in the income statements and statements of financial position were calculated.

Shareholders are also likely to compare the performance of the company they own shares in with other companies they could invest in, either in the same or different industry. To do this, shareholders (and analysts, who advise larger, institutional shareholders such as banks and pension funds) will look at ratios, which compare one figure with another to show relative changes in performance (such as gross profit margin, which is the gross profit divided by the revenue), to indicate for each unit of revenue (£, €, $, and so on), how much has been converted into profit. This allows shareholders to compare how effective the management has been even when revenue falls or grows in a given year.

Financial analysis techniques are covered in depth in Unit 16.

Using ratios allows the users of financial statements to compare organisations of different sizes more effectively. Similarly, to assess how efficient the management has been in using the funds that shareholders and other finance providers have made available to the company to generate profits, they will examine ratios such as return on capital employed and return on assets. Finally, shareholders will assess the liquidity or solvency of the organisation, to determine how likely they are to receive dividends.

Non-financial information

In addition to the financial information discussed above, shareholders also want to understand what is behind the figures, how the organisation works and more about how it creates value from its activities. For example, we noted that revenue in BP had declined from 2022 to 2023, and costs had also fallen, but we don’t actually know why just from looking at the financial statements. Therefore, shareholders will also read the rest of the annual report, which includes the company’s narrative about its performance during the year. Usually, organisations explain what their mission, aims and strategy are – what they have done in the past year, what they are aiming to accomplish in the organisation in the future and how they will achieve this.

It is important to understand how stable the organisation is, how those in management are likely to grow the organisation in the future and what risks they perceive in the business. This is because although some investors will invest in businesses which are higher risk in the expectation of higher returns, others will choose to invest in businesses which are lower risk, even when they provide lower, but potentially less volatile, returns. Companies have to provide a lot of information about how they run their business (governance), what the key risks are, and how the management mitigates these risks, and also other information such as how much the company pays its key executives and how its activities impact the environment and society. By providing this information, individual investors can decide whether the company is one they want to invest in: do they agree with the aims of the organisation, its values, how it is run and how likely it is to remain in business in the future?

For an in-depth exploration of non-financial reporting, see Unit 14.

One key thing to consider regarding non-financial information is how reliable it is. Non-financial information can be inherently subjective, and companies can choose what to include and what to leave out; while it is not formally audited in the same way the financial accounts are, the members of the management should not mislead users. The external auditors of the company will review some of the non-financial information and provide their view on the key risks that the management reports. They are obliged to check that nothing said in the non-financial information included with the financial statements conflicts with the accounting data that they have audited. They will not provide the same level of assurance on this information as they do on historical financial data, however, so ultimately it is for investors themselves to determine how well they believe the company’s management has performed and will perform in the future.

Loan providers

Loan providers provide short- and long-term funding to organisations, ranging from short-term drawdown overdraft facilities to very long-term bonds and debt which can be unsecured (no collateral is pledged against the liability) or secured (whereby the organisation pledges a single asset or pool of assets against the liability, usually to obtain beneficial lending rates). Colloquially, secured loans are often described as ‘mortgages’.

Loans usually comprise a series of interest or finance charges paid over the term of the loan, and then the original loan amount, called the principal, which will be repaid at the end of the term (the amount of time the money is lent for). However, there are many diverse types of loan and borrowing arrangements. Loan providers are most commonly banks, but they can be other companies which will, for example, fund particular types of assets or which will buy the trade debt or receivables in an organisation for the flow of interest payments and repayment of the principal amount.

Financial information

Essentially, loan providers want to know similar things to shareholders: they want to understand the profitability, liquidity and gearing of an organisation to assure themselves that they will be paid any ongoing interest or finance charges, but also that the organisation will be able to repay the loan at the end of its term. This will include information about other claims on the organisation, such as other debts, and also whether the cash flow generation of the organisation will allow it to be able to repay the principal when it is due.

Some debt might also be convertible into shares in the company, rather than be repaid – usually at the option of the loan provider. In this case, the loan provider will want to track the share price of the organisation against the amount they would receive from being repaid. If the share price multiplied by the number of shares they would receive is higher than the loan principal due to be repaid, then they are likely to convert their debt into shares. Otherwise, they will accept repayment of the loan principal on maturity of the loan instead.

Customers and suppliers

The Schwarz Group’s full name is Schwarz Unternehmenskommunikation GmbH & Co KG.

Customers and suppliers are two opposite sides of a commercial relationship. Whether customers look at their suppliers’ financial or non-financial information (or vice versa) is largely dependent on the scale of the relationship between them. For example, it is highly unlikely that a customer of a retail organisation, such as Walmart, Schwarz, Aldi or Tesco, would ever need to look at their financial reports to make a decision about whether to purchase goods or services from them, as the relationship between a retailer and an individual customer of this sort is rarely sufficiently financially important enough to justify that. However, that changes if the customer relies on a particular supplier, either for access to certain key materials or services, or in financial terms. Equally, if a supplier is reliant on a key customer, then again, they are more likely to want to assess the financial and non-financial information on that customer.

Financial information

Most organisations will assess the profitability, liquidity and solvency of their key customers and suppliers, using the same kinds of information as we discussed earlier. They might also be keen to ensure that these key partners are likely to pay their bills, be creditworthy and remain in business in the future.

Non-financial information

While their focus will be on financial information, customers or suppliers will often track market data, such as market share or customer or supplier opinions/rankings, including their reputation, as many organisations will not wish to trade with customers or suppliers who have a poor reputation. This information can include if the organisation is involved in lawsuits, and how it manages its environmental, social and governance (ESG) activities.

Equally, as many organisations are reliant on each other within their logistics supply chain, there is an increasing need to monitor product and service quality and performance against international standards, such as ISO 14001 (environmental management) or ISO 9001 (quality management).

Employees and community

Most employees, ex-employees (for example, retirees or those who have left to join another company) or potential employees will seldom read the annual report and accounts of the organisation they work for, have worked for or are aiming to work for, as the information is not really targeted at them. This can also be said of the general community (people who have no direct interest in the organisation).

These groups may choose to read certain non-financial elements of the report, such as the executive pay section (which employee unions could use in their salary negotiations, for example) and sections discussing pension schemes to determine the security of those schemes to deliver pensions when they fall due; many corporate pension schemes in recent years have had significant deficits on them. There may be other sections of interest, such as environmental and social issues, to understand the ethos and performance of the organisation in these areas to determine whether it is a good corporate citizen and a good company to work for or to have in the community.

In Unit 11 we investigate company ‘factfulness’ in more detail, using sustainability reporting as an example and suggesting approaches that can be adopted to form our own opinion.

In the digital age, however, it is easier to follow an organisation’s activities on the internet or in social media, and to read current news stories or track opinion on them rather than read annual reports. Social media and the press can influence people’s opinions of an organisation positively or negatively. These opinions can be justifiable but might also be affected by misinformation being circulated, sometimes maliciously. Organisations can use social media and the press to support their message, but it can backfire if they are perceived to be manipulating public opinion.

Government

The main interest that government has in organisations is ensuring that they operate within the law. In the United Kingdom, for example, the Companies Act applies to companies and the Charities Act to not-for-profit organisations.

Equally important for government is that organisations are collecting and paying the correct taxes. In the United Kingdom, for example, corporation tax, value-added tax (VAT), pay-as-you-earn (PAYE) payroll taxes, national insurance contributions, capital gains tax and various other taxes – such as those relating to payments made or received from overseas – are payable. Organisations will often complete a confidential tax return which will reconcile to the financial statements but will show more details and the basis for calculating the tax for that organisation.

A government is unlikely to use the annual report to determine compliance with the law unless there is cause for concern about its activities (for example, in the case of suspected fraud or if a company is not deemed to be a going concern). This is because many companies and organisations report separately to governments on a range of their activities, such as investments in assets, exports, tax accounts, tax calculations and receipts, employee data, and so on. In this case, while a government might be interested in both the financial and non-financial data of the organisation, it does not usually need to look in the annual accounts for further information unless it needs to corroborate the data it already has. A lot of the data received by government through their reporting systems forms the basis of national government statistics. Examples include data showing numbers of people employed, investments in non-current assets, research and development activities, exports, and the use of technology in industry.

3.4.2 Not-for-profit organisations

Not-for-profit organisations can range from large organisations with multi-million-pound turnovers, run by professional management teams, often with a global presence and impact, to small local charities, run by volunteers and trustees, such as community sports clubs. What they have in common is a specified charitable mission, which can cover a wide variety of activities such as sports, health, religious worship, environmental protection, social issues, research, education, or support for a specific group of disadvantaged people or endangered animals. In these cases, it is normal that all income earned and any surpluses (where income is greater than expenses) should be directed at delivering against the mission of the not-for-profit.

The needs for financial and non-financial information from stakeholders or interested parties of a not-for-profit organisation (sometimes also referred to as the ‘third sector’) are similar to those of a for-profit organisation as discussed in the previous section. For example, some finance providers or suppliers will still look at the income, surplus or deficit, liquidity and solvency of not-for-profits, although the format of their financial information looks a little different to that of a for-profit organisation. See the case study data on the British Heart Foundation (BHF) in Tables 3 and 4 in the appendices to this unit to understand some of the key differences.

Some not-for-profits also have employees who are paid and have the same information requirements as in a for-profit organisation but they may also have people who work for no payment (volunteers) and/or oversee the organisation (trustees).

• Volunteers may have less interest in the financial information of the not-for-profit, although they may be interested in ensuring that the not-for-profit continues to operate according to its charitable mission.
• Trustees have the same information requirements as managers in a for-profit organisation.

Many not-for-profits have an additional group of finance providers (donors), and the customer base is usually quite different for a not-for-profit as they are typically the beneficiaries of the organisation. We will briefly discuss these two interested parties in this section.

Donors

For most not-for-profit organisations, donors are critical finance providers who ensure the continuing ability of the organisation to deliver its charitable mission. Donors can be individuals or other organisations, including the government. For example, the government may provide grants to organisations such as the Arts Council that supports organisations, artists and events through the award of grants or to arms-length bodies, such as Historic England and Sport England. Other large not-for-profit organisations can be government- or taxpayer-funded organisations themselves, such as the UK’s National Health Service.

Many donors are individuals and can choose to provide money to a not-for-profit on an ad hoc basis or through regular, monthly donations. They can provide money in their will as a legacy or endowment after they die. Usually, donors provide financial support based on their belief in the work the not-for-profit carries out, therefore it is important that not-for-profits are clear about how much of a donation is spent on the cause and how much is used to run the not-for-profit or to raise further funds. Where donors feel that not enough is spent on the cause or the not-for-profit is not seen to be acting responsibly, they may choose to stop donating. There has been a growing focus on transparency and professional management behaviour in the not-for-profit sector.⁸

While many donors may not actively seek out financial information on their chosen not-for-profit organisation, they may still follow them on social media or in the press and keep themselves informed about their activities in this way.

Customers and beneficiaries

Some larger not-for-profits may have significant trading activities as a source of income. Some may operate retail outlets for the sale of goods (such as donated clothing and other items) and will have customers just like for-profit retail organisations (such as Oxfam).

The beneficiaries or service users of a not-for-profit are the individuals, groups or communities that the organisation aims to support or serve. These beneficiaries can vary widely depending on the mission and goals of the organisation. Some common examples include:

• Community members
• Disadvantaged groups
• Environmental causes
• Educational institutions
• Healthcare recipients
• Cultural and arts communities

In most cases, these groups of people will not normally seek financial or non-financial data on the not-for-profit, but the entities would be unwise to ignore them.

3.5 Summary

• Data can be both quantitative and qualitative.
• The fundamental qualitative characteristics of faithful representation and relevance help guide the usefulness of data. They are supported by four supporting characteristics of:
  • comparability
  • verifiability
  • timeliness
  • usefulness.
• Qualitative data can help users interpret quantitative data to make informed decisions about their engagement with organisations.

Appendices