Thursday, 11 January, 2018
Summary: Without strong and effective thought leaders, we have a problem, as it’s these people who provide direction. I’m concerned that while we may have many specialist thought leaders providing thought leadership for their specific discipline, there is a lack of depth and quality of thought leaders for the broader issues facing us. This is the most critical thought leadership of all, so where is it???
My understanding of a thought leader is somebody who tackles the big issues, providing insight into how we should approach the wider problems or opportunities facing us. By definition, this would exclude experts from within specialist fields who make predictions regarding their discipline, such as AI, robotics, medicine, environment, etc.
Without wider contextual considerations (or thought,) specialist thought leadership is potentially flawed because their predictions are made on limited contextual assumptions. Therefore, it’s critically important that we have thought leaders who query and challenge the broad context, as it affects everything and everybody. Our primary thought leaders are those who tackle the big issues. This does not diminish the role of specialist thought leaders (far from it,) but simply highlights the importance of primary thought leaders in providing greater understanding and insight into different possibilities.
However, here’s the worrying thing - where are these primary thought leaders? There appears to be a serious dearth of them. Perhaps if I explain what I believe is the broad context which requires significant thought, we can agree there is little, or no thought leadership, within these areas.
There are two important aspects which directly affect our future. The first deals with the ideology under which business/society functions. For the vast majority of us, this is Capitalism. The second deals with us as individuals and our role and responsibilities in ensuring a sustainable and fair existence for all.
Calls have been made from all quarters that Capitalism is not fit for purpose. Some are anti-Capitalists in every respect, while others acknowledge its problems, but point to its merits as well. Their call is “Don't throw the baby out with the bathwater.”
However, whatever way we look at Capitalism it doesn’t appear to be working for the majority, or the planet’s well-being. Alternatives, such as Socialism, have already proved disastrously inadequate.
This leaves us trundling towards an unknown, less favourable future, with no credible thought leadership to provide alternatives. The frightening aspect of all this is that revolutionary change faces us, in the form of AI and robotics. This will herald in a new business epoch, which will vastly change future employment, economic growth and the social landscape, and we will introduce this into a dysfunctional ideology - Capitalism.
The powder kegs are in place - the only unanswered question now is what will light the fuse?
We need genuine thought leaders who will tackle the so-called problems of Capitalism and come up with an ideology, or solution which will serve the needs of all. Unfortunately, I’m not aware of any who have provided any insight into the problem.
This leads me to the second big issue which needs addressing. We need to tackle the problem of unbridled consumerism. The harsh reality is - global resources cannot sustain ever-increasing consumer demands as emerging economies emulate those of developed economies.
Just because we have the wherewithal to consume does not give us a right to do so. We, as individuals have to accept responsibility for our consumption and its consequences. This is not the sole responsibility of business. It’s a shared responsibility.
Rather than celebrate opulence, we need to re-educate people to celebrate frugalness, product longevity and be resource conscious. How forcefully are thought leaders promoting this idea? Not very well as the celebration of opulence is still manifest in every facet of life. Take popular TV programmes as evidence that the message is not getting through, in fact, the opposite is happening. As an example, consider the BBC TV programme called “Master Chef.” It’s a programme which encourages opulent waste of resources to serve the palate of the well-to-do, commonly referred to as “fine dining.” As a national programme, it should encourage taking simple, inexpensive, sustainable foods to produce exceptional meals within an affordable budget. The winners should be those who produce the best from the least. Poorer nations, such as India, Mexico, Thailand (and others) have proved that taking simple, readily available ingredients can produce exceptionally tasty meals. This food example is applicable to all facets of life. We, as consumers, need to cut back and learn to live a more minimalistic lifestyle.
The message of frugalness, product longevity and resource-conscious consumption has to permeate every facet of life to support a sustainable, high quality of life for all, not just a select few. Our current mentality and behaviour is the antithesis of this.
So those are the two broad issues we need to address to ensure we can all live a prosperous, sustainable life. If your only objective is a prosperous and sustainable life for you and your family, then prepare yourself for the complete opposite. We have to think of collective good and collective consequences.
Adrian Mark Dore
*** You may reproduce this article provided you acknowledge Adrian Mark Dore as the author and make reference to this website. ***
Friday, 15 December, 2017
Summary: Supporters of Capitalism put forward strong and logical reasons why Capitalism is socially beneficial. On the other hand, antagonists of Capitalism point to all the problems which they ascribe to Capitalism, which are numerous and serious. They can’t both be right, so what’s going on?
The simple truth is that we claim to be Capitalists as we follow certain principles of capitalism, namely that of free enterprise, but that alone does not make us Capitalists. Both parties mistakenly believe we are Capitalists when in fact we are nothing of the sort. This accounts for the diametrically opposed views of both parties being correct and true. They are arguing at cross purposes, as neither understands that we are not following the important principles of Capitalism; we are not Capitalists.
Something has hijacked the Capitalist ideology, which everybody thinks we follow, but the evidence proves otherwise. So what is it that has hijacked our Capitalist principles so cleverly?
Ideologies deal with the things we say we believe in. We can say we believe in anything, even although we may not, because, talk is cheap. It’s what we do that determines what we truly believe. To ensure we achieve what we truly believe, we measure performance. Measures dictate outcomes. Outcomes reflect what we believe. Therefore, we truly believe that the creation of short-term profit for the exclusive benefit of shareholders at the expense of other business constituents (or stakeholders) is the purpose of business. This is what our business measurement standard measures. However, this, by definition, makes us Profiteers, not Capitalists. A Profiteer is an entity which use an unfair advantage to create profit. The unfair advantage, under these circumstances, is our measures, which only favour the interests of shareholders, over other constituents involved in the value creation activities of the business. Normally, profiteering involves “external profiteering”, where the business creates a profit at the expense of other businesses, the government, etc. (i.e. external entities.) However, in this case, it’s a matter of “internal profiteering”, which is a far more insidious form of profiteering, as business owners profit from their own stakeholders, or partners (i.e. internal entities or partners); those dedicated to generating profit for the business.
Now we are clear that we are Profiteers rather than Capitalists, the two divergent arguments made by pro and anti-Capitalist makes sense. Profiteering is the root cause of our most serious social, environmental, economic and business problems. So, the anti-Capitalist arguments are true about greed, self-interest and exploitation, but misdirected at Capitalism rather than our inadequate and inappropriate business measures.
The pro-Capitalist argument that Capitalism benefits society remains true, but its full benefits will only be appreciated when a measurement standard is introduced which supports its principles.
The problem with pro-Capitalist supporters is their almost flippant dismissal, of the “ills of Capitalism”. An attitude which suggests that because “the principles are right, the price is worth paying.” However, the ills presented by the anti-capitalists are real and life-changing and should not, and cannot, be brushed aside. It is almost with a mocking tone they dismiss anti-Capitalist groups as the “ignorant plebs.” After all, free-enterprise has brought about improved living standards for most. Furthermore, the ideology is not coercive, it is based on freedom of exchange - willing buyer, willing seller. So it’s a good ideology to follow.
Of course, they are right, but they should have delved a little deeper, questioning how an ideology supposed to serve us is not (with the evidence all around us.) It’s clear to all, whatever we are doing, we are headed towards a vastly changed and less favourable future for the majority. Instead, they go on the defensive, claiming Capitalism is not based on greed, self-interests and exploitation.
The reality just doesn’t support this argument. Yes - Capitalism does not support these principles, but the penny should have dropped by now - perhaps we aren’t Capitalists. They as the intelligentsia should have seen that Capitalism has been hijacked by our inadequate and inappropriate business measurement standard.
So, if I were asked to pick sides in this debate, I would say both parties are wrong, because, they both blamed an ideology we do not follow. However, I would suggest that the pro-Capitalists are the delinquent party, as it is their ideology, and they should have known it better than most. They should have been able to point out the obvious problem - Capitalism has been hijacked by our business measures.
It’s their indolence which has, and still is, costing us. Until they stand up an identify the real cause of the problem (our inadequate and inappropriate business measures,) the problems caused by our measurement standard will persist. They indirectly encourage the misbelief that Capitalism is our problem and needs fixing and that they somehow have a solution for us. By not addressing the true problem, the harm and hardship continue.
They could easily shift the blame to the real culprit but do not. Why, is this so? Do they want the myth of Capitalism being our problem to continue? Do they want this Capitalism smokescreen, which hides the real culprit, to continue? Are they part of the problem, as they are doing little to promote the solution by drawing attention to the actual problem? They behave in a manner which appears to maintain the smokescreen.
Let us be realistic - the problems we face are measurement related, so the solution must involve measures which address these problems. The naivety in believing that ideologies, or good ideas and a lot of talk will dislodge deeply embedded measures, which our economy relies on, is almost unbelievable. In my opinion, there is little, or no grasp, of the situation, for whatever reason.
Inclusion Capitalism, one of the pro-Capitalist organisations, has joined up with Ernst & Young on their LTV (Long Term Value) project, but this project fails to meet our two minimum requirements for a new measurement standard. As one of my earlier articles “Why are they trying to pull the wool over our eyes?” pointed out, the accounting fraternity has failed to identify the two minimum requirements for a solution, which they should have been able to do. The question then is - “Are they trying to pull the wool over our eyes?” Understandably, they have vested interests in maintaining the status quo. They are happy that confusion reigns as to the cause of our problems, and that the blame is placed at the door of Capitalism. Is the Accounting fraternity backing pro-Capitalist groups, who help stoke this fire of confusion?
Who knows? However, we do know it’s time to stop the farce by blaming Capitalism for the immense problems caused by our inadequate and inappropriate business measurement standard. It’s time to restore the good name of Capitalism and correct our measurement errors now.
Adrian Mark Dore
*** You may reproduce this article provided you acknowledge Adrian Mark Dore as the author and make reference to this website. ***
Monday, 04 December, 2017
Why are they trying to pull the wool over our eyes?
Summary: For more than three decades the accounting profession has known we have a problem with our Accounting Model - it’s not fit for purpose as a business measure. They have also known for as long what the requirements for a solution should be. However, only now have they acknowledged the problem, but what they suggest as a solution in no way meets our needs. How can these so called “experts” get it so horribly wrong? Are they trying to pull the wool over our eyes?
For three decades we’ve known of all the shortcomings of the Accounting Model. There has been a lot of water under the bridge since then, but none of these things, as tumultuous as they have been, have added any new shortcomings to the list. They have certainly accentuated existing problems and made the situation considerably worse, but nothing new.
If you have a clear understanding of the problem, then you should have a clear understanding of what the solution should entail. Therefore, for as long as we’ve known about the problems, we have also known what we should do about it.
Accountants, their associations, institutions and academics, as well as those involved in business performance measurement are those most closely involved with this problem. They, as professionals, should have known of the problems and of the requirements for a solution.
So given the above, we can confidently conclude:-
- They have known of the problem for 3 decades (or thereabouts)
- They have also known what’s needed to fix it for as long.
- Yet, they have done nothing, thus far, about it.
- Now, that they can no longer hide from, or deny, the effects of the problem,
- They say they want to fix it.
- However, their proposed solution in no way resembles our needs.
This does beg the question - “What’s going on?” Perhaps they’ve just got this whole thing horribly wrong, in which case they aren’t experts at all, or perhaps they are trying to pull the wool over our eyes?
By them acknowledging the problem that our measurement standard is inadequate and inappropriate, we think they are on the side of change, that the problem will now be addressed. We feel reassured as the “experts” are on the case. However, by showing a total lack of understanding of our requirements for a solution, you have to ask yourself are they really “experts”? After all they’ve done nothing about a major problem that’s been right under their noses for 3 decades, and then when they finally acknowledge it, they show they have no understanding of our needs whatsoever.
That’s one conclusion, but perhaps another is they are simply playing for time. What they are trying to do is extend the life of their outdated measures and practices, which serve their needs not ours. They establish a smokescreen of “doing something about the problem”, when they know (or should know) it will fizzle out in what they hope will be a decades time. Bear in mind they are the ones who promote capitalism as being the source of our problems despite knowing (or should know) that their Accounting Model (as a business measure) is the problem, and that it has nothing to do with capitalism. The capitalism smokescreen has effectively hidden their bad practices for decades and diverted attention away from the real problem.
So, we are left with these two obvious conclusions. Either they are not experts and therefore not suited to lead change, or they are playing a devious game and therefore not suited to lead change.
Here, you decide if they have misidentified our requirements for a new measurement standard, because, it all revolves around this, as they have finally, after 3 decades, acknowledge the problem.
Our requirements fall into two section.
1) Our broad understanding of business as it affects our business measurement needs.
2) Specific requirements.
1) Broad requirements.
Our broad requirements are based on some fundamental understanding of business, such as:-
- Business functions as a cause-and-effect (causal) model.
- A causal model is fully inclusive of all constituents, based on their interrelationships.
- Value creation is the common denominator of business (i.e. it is the common objective of all business processes.)
- We need a clear understanding of this model; it’s structures and interrelationships, to be able to measure and manage business effectively, so as to optimise value creation opportunities for all constituents.
2) Specific requirements.
A new measurement standard must meet these specific requirements.
- Comparable: Our economy relies on comparable measures across all businesses irrespective of sector or size. Incomparable measures are valueless to the market (investors.)
- Relevant: It has to solve our need - to provide insight into the value creation potential of business for all stakeholders, including shareholders.
- Reliable: Our new measurement standard needs to be prescriptive. It needs to be specific on what to measure and how to measure. It needs to establish the rules and standards and they need to be assured.
- Simple/easily understandable: It has to apply to all. Therefore, it has to be simple and easy to understand.
- Useful: It has to provide a roadmap, which even the smallest business can understand and use to help unlock value creation for all constituents.
Let’s have a look at the major “solutions” on offer currently and see how they shape-up in meeting our requirements. To do that, all I’m going to do is ask two questions, one each from our broad and specific requirements. The questions are:-
1. Is your solution based on any
understanding of the value creation causal model?
2. Is you solution comparable?
If both questions are not positively
affirmed, it’s no solution.
If both questions are negatively affirmed, it’s a complete waste of time.
The “solutions” we will look at are as follows, with their answers shown next to them.
|Solution||Question 1||Question 2|
|Global Reporting Initiative||No||No|
|IIRC (International Integrated Reporting Council)||No||No|
|UN Reporting Framework||No||No|
|Ernst & Young LTV (Long Term Value)||No||No|
Although the list is not extensive, none of the other less well known solutions fare any better. All these solutions are backed by the “leading lights” from the Accounting fraternity - International accounting associations, academics and all the leading practitioners.
We can be thankful that at least they have finally got around to acknowledging the problem; that our inadequate and inappropriate business measures (i.e. Accounting Model used as a business measure) is the root cause of our most serious social, environmental, economic and business problems. Capitalism isn’t the problem, but rather our business measures. It’s taken them three decades for them to do this, but now they cannot identify our requirements for a solution correctly. Whatever the reason, it strongly suggests they are in no position to lead change.
When you’ve played a dominant role for so long as the “expert”, it makes embracing a new world that more difficult, for you have neither the knowledge nor skills to do so. You are an expert in by-gone knowledge and thinking. What we need is a paradigm shift in thinking and approach. It does not involve the rearranging of the deck chairs on the Titanic, as our “experts” suggest.
Adrian Mark Dore
*** You may reproduce this article provided you acknowledge Adrian Mark Dore as the author and make reference to this website. ***
Wednesday, 08 November, 2017
Capitalism isn't our problem.
Summary : We think we follow a Capitalist ideology and therefore the problems we face today are of Capitalism’s making. That's the fundamental mistake we make - we assume we are Capitalists when we are not. We are something far more sinister. We are no more than Profiteers masquerading as Capitalists.
When is a ideology like Capitalism no
When it doesn’t serves the needs and aspirations of its constituents, or stakeholders.
Capitalism must be fast approaching that point because we have numerous organisations, movements and thought leaders around the world calling for change. There are even organisations calling to oust it completely. Books are being written on “Post Capitalism.” These voices are becoming louder and more vociferous by the day, and their numbers are swelling rapidly.
Clearly, we have a problem. As the old adage goes, “no smoke without fire.” We don’t have to look too far for simple indicators to see the calls for change are valid, and that our systems are not serving their constituents well. We don’t have to get super analytical either to see this. Two simple indicators tell us all we need to know.
The first indicator is the rich/poor divide which has developed into a chasm and widening faster than ever before. It tells us that our systems are not working for the average person, but rather the rich. It also tells us that our economies are under-performing, as a strong middle class is indicative of a strong economy, not a polarised economy where excessive wealth is held by the rich. As the average person is not benefiting from economic growth and in many instances facing real income decline and with government spending reduced through under performing economic growth, the impact on the less well off becomes more prevalent. This means the well-being of the average person is in retreat. They aren’t being served by our systems. This could lead to social unrest. We have already witnessed the start of it. Further deterioration in the situation will see an increase in unrest, until changes are made, one way or another.
The second indicator is the deteriorating environmental situation, across many fronts, not just global warming. Resources are extracted at any cost to drive an economy which only benefits a few. It’s clear to many, our planet cannot sustain the level of increasing demand placed on it. Change has to be made.
So, these two simple indicators, of which we are all acutely aware, tell us, in no uncertain terms, that our systems aren’t working for us and are, in fact, hurting us socially, environmentally and economically.
TIME FOR CHANGE!
We all agree.
But ,what are we to change?
Capitalism of course! It’s a system we’ve been following for years, so it must be the root cause of our problems. But is this true? Is Capitalism at the heart of our problems, or is there perhaps something we have overlooked?
Capitalism is about free enterprise and the need for business to create a profit. It’s certainly not unreasonable for business to generate a profit, otherwise it won’t survive and grow, and we need businesses to survive and hopefully grow over the long-term as it’s an essential part of a thriving community. Free enterprise also holds merit for the majority of us, so how are these two fundamental principles now so destructive and working against the majority of us?
The simple truth is they aren’t. So, if the principles of Capitalism aren’t to blame for our problems, then clearly we aren’t Capitalists. But, if we aren’t Capitalists, what are we and what’s causing these problems?
The reality is, business is focused on short-term profit creation for the exclusive benefit of shareholders, at the exclusion of all others. This profit obsession, for the benefit of a few, lies at the heart of our problems. It is our inadequate and inappropriate business measures which focus us on, and drives our short-term profit obsession for the benefit of shareholders at the expense of all others. Remember, its measures which have the greatest impact on outcomes, not ideologies, such as Capitalism.
Consider the following reality check, which puts the cause of our problems beyond any doubt.
- We use financial measures as a business measure, yet financial considerations effect less than 20% of the value creation potential of business. Therefore, it should be obvious to all - financial measures as a business measure are entirely inadequate and inappropriate.
- However, despite this, we persist in using it as a business measure because, it’s our only comparable measure, and comparison is essential to our economy
- This leads to the biggest problem of all - it forces businesses into compromising non-financial measures to ensure they achieve strong financials
- This creates an imbalanced system where global resources are used for the benefit of a few, at the expense of the many. By definition, this makes it a profiteering system, as our measurement standard unfairly favours shareholder interests over all others in the generation of profit. We are not capitalists but profiteers.
- This profiteering approach of serving only shareholder interests has made it the single biggest root cause of our most serious social, environmental, economic and business problems
- It’s an approach which serves nobodies long-term interests. This is because an imbalanced system cannot perform effectively or efficiently
- As measures dictate outcomes, we need a new measurement standard which will ensure a balanced approach in serving the needs of all constituents, thereby placing business on the path of normality. Little or no change comes about through philosophical ideas alone - we need new measures.
Let’s be very clear on how we define a profiteer and why we meet that definition, so that we are in no doubt that our inadequate and inappropriate business measures have turned us into Profiteers. I know many will find the term “profiteering” hard to equate to their business, but the reality is if they use a measurement standard which favours one constituent over all others, for the purpose of maximising profit, that by definition, makes it a profiteering system, whether they like it or not. Normally, we understand profiteering to involve an external event where business profits from external entities (i.e. other businesses, government, etc.) but the profiteering we practice is more insidious as it’s an internal form of profiteering. We profit by excluding stakeholders (our partners in business) from their just reward, and it’s all because of our inadequate and inappropriate business measures.
Unless we introduce a new business measurement standard which serves the needs of all stakeholders, we remain Profiteers. Profiteering may benefit a few over the short-term, but it hurts us all over the long-term.
Adrian Mark Dore
Friday, 15 September, 2017
A widening rich/poor divide hurts us all.
Summary: The rich/poor divide is an important indicator of economic and social well-being. The wider it is the weaker the economy and the higher the social discontent and hardship suffered by those at the bottom of the scale. One of the main drivers of this widening gap is our inadequate and inappropriate business measurement standard, which serves the needs of the rich. Currently, business is a tool for the enrichment of a few at the expense of all others. However, a new measurement standard would stop this by serving the needs of all business constituents through a balanced approach.
Our inadequate and inappropriate business measurement standard has turned us into profiteers. Our profiteering practices have contributed to the widening rich/poor divide as business is focused on short-term profit generation for the exclusive benefit of shareholders; the owners of capital - the rich.
Wealth distribution which is skewed disproportionately towards the rich is bad for the economy and society for these reasons.
A strong middle class indicates a strong
economy as their income is recirculated quickly and almost in its
entirety within what I call the “active economy.” Adam Smith (the
“father” of modern economics) identified three forms of income -
profit, wages and rent. Profit and wages are earned in what I call our
“active economy” as the owners of capital and labour have to do
something to earn a profit and wage respectively (i.e. they are active
participants in the economy.) However, rental income does not involve
active participation; it involves the transfer of money from one party
to another based on one party’s ownership of a scarce resource. The
owners of property undertake no active role in the economy. Therefore,
it would be inaccurate to include this income with that of the active
economy as no productive output is involved. Consequently, it is
allocated to what is referred to as the “rentier economy”.
- As the rich only consume a small portion of their income (i.e. they can only eat a few meals a day and only buy a limited amount of clothes compared to mass consumption,) they generally invest the balance in the rentier economy as risks are (often) lower and returns higher than the active economy. Money earned in the active economy, but withdrawn from it, weakens it. This is not good for the majority of us as the active economy is the engine of our economy and society.
- When our active economy is weakened (through fund withdrawal,) investment returns weaken, with a proportionate increase in risk. This redirects greater funds out of the active economy, thereby accelerating the downward cycle.
- For the above reasons the so-called “Trickle Down Effect,” where the wealth of the rich is supposed to trickle down and positively influence the less well off does not work, because only a small percentage of their income remains in the active economy, with the bulk redirected to the unproductive rentier economy.
- Income generated by “rent” (from our ever-expanding rentier economy) masks growth, as rent cannot be classified as productive economic activity. Government’s understanding of economic growth and planning is therefore flawed. This impacts negatively on wider society.
- As our inadequate and inappropriate business measurement standard focuses on profit creation for the exclusive benefit of shareholders (the rich), these profits ultimately find their way into the rentier economy. In other words, funds are syphoned off from the active economy dampening it down even further. Our inadequate and inappropriate measurement standard represents an inbuilt fund syphon for the rentier economy. Once there, it becomes “dead funds”, unlikely to ever return to the active (or productive) economy, as explained in the next section.
- The rentier economy is innovation and risk-averse, so once funds end up in this economy they are unlikely to return to the active economy, which is dependant on innovation for returns. While innovation holds the potential for high rewards, it is equally risky. So funds don’t flip-flop between the two economies. Once funds enter the rentier economy they are generally lost forever to the active economy.
- The rich are also good at tax avoidance, so the greater the rich/poor divide a greater portion of revenue avoids taxation, resulting in governments shifting the tax burden down the line to the less well-off and those who can ill afford further financial burden.
- The wider the divide between rich and poor, the higher the social discord, which could ultimately lead to social unrest and upheaval, which probably won’t serve the rich well. We have already witnessed the start of unrest in the form of the “Occupy Movement.”
When I refer to the rentier economy you must realise this does not only include income generated from property, but from a wide, and ever-expanding source of “scarce” resources. This includes control of natural resources and intellectual property, which incorporates copyright, trademarks, trade secrets and patents. While there are many benefits to be had in developing intellectual property for the active economy, problems arise in their excessive protection. These often well exceed the investment and risk undertaken in the first instance and become a vehicle for the rentier economy.
We face a serious problem where in rich economies a large and ever increasing portion of the economy moves towards the rentier economy. This keeps driving the rich/poor divide which in turn dampens our active economy. This certainly does not bode well for its citizens.
What concerns me is that our inadequate and inappropriate business measure play a key role in this problem, making it another important reason to introduce a new measurement standard.
Adrian Mark Dore
Friday, 18 August, 2017
Summary: There’s a strong possibility we will be known as “Generation Profiteers” by future generations, because despite masquerading as capitalists, we are nothing quite that noble. In fact, we are no more than grubby “profiteers.” What a shameful legacy. In fact, we are the worst form of profiteer - read the article to find out why.
If we do nothing, this historical perspective will stick - a legacy of plundering global resources of every kind for the enrichment of a few at the cost of the many.
If you are not already a strong convert of change, then this article should make you see the desperate need for it, otherwise, I’m not sure what will? This article is not anti-business - far from it. It’s pro-business and capitalism, but with a completely different understanding of what capitalism represents.
A strong and plausible argument has been made suggesting that our current business measurement standard is the root cause of our most serious social, environmental, economic and business problems.
Given such a serious indictment of poor behaviour, surely our first priority should be to establish the truth, because if it’s true, then the introduction of a new business measurement standard should be a top government and business priority globally, despite perceived difficulties in finding a solution. It presents no greater challenge than any other exploration of the unknown. Perhaps, even less of a problem than we think.
We have known for a long time that something is wrong with business behaviour. Many have wrongly accused Capitalism as the culprit, but this is simply fallacious. Capitalism is an ideology, which recognises the spirit of free enterprise and the need for business to generate profit. It places the longevity of business before the profit objective, thereby acknowledging that a profit obsession, at the expense of other constituents, does not serve business longevity well. It favours the need for balance. So, the fundamental problems of business lie elsewhere - it lies in its systematic and slavish pursuit of profit, as the sole objective of business.
The plausibility of the claim that our current measurement standard is the root cause of our problems is strong, because we know:-
- Business outcomes have a direct and significant influence on society, environment, economy and business itself. I’m sure few, if any, will dispute this.
- We also know that measures dictate outcomes. Here’s a simple analogy to prove this. If you referee a game using the rules of another game, you soon turn that game into a game of the referee’s rules. It’s the same with business, measure the game of business according to financial rules and you get a “financial game”, not a game of business, which are two vastly different games.
We know business affects everything, and our measures dictate outcomes. So, bad measures equate to bad outcomes! What then makes our current measures so bad?
We know that financial measures account for less than 20% of the value creation potential of business. Therefore, if we use financial measures as a business measure, it stands to reason it will be hopelessly inadequate and inappropriate as a business measure. Finance is not business, it’s only a small part of business. Furthermore, financial measures represent a single perspective - an exclusive shareholder perspective. However, despite our clear understanding of its inadequacies and inappropriateness, together with its exclusion of other important constituents (or stakeholders,) we persist in using it as a business measure, because it is the only comparable measure we have. Comparison is the cornerstone of our economy.
Although businesses use non-financial measures extensively, these measures are unseen and unknown by the investment market, and therefore, face the strong probability of being compromised in favour of producing strong financials - the only measure which matters. Our problem lies in our lack of comparable, non-financial measures, which forces us into using inadequate and inappropriate financial measures, with their exclusive shareholder slant, which results in our obsessive pursuit of profit for the exclusive benefit of shareholders.
Had Adam Smith (1723-1790,) commonly referred to as the “father of modern economics,” been alive today he would have scoffed at the notion of us calling ourselves capitalist. He would have no hesitation in calling us profiteers. A profiteer is described as an entity which uses unfair advantage to gain profit over others. That is exactly what our current measurement standard does. It focuses on the enrichment of shareholders through the exclusion of others. The exclusion of others, is an unfair advantage. They profit off the back of other’s inputs, ignoring their true cost and need for recompense. We often think of profiteering as an external act, where a business profits from an external entity (such as other businesses, or the government.) However, this form of profiteering is internal, where the business profits from its own stakeholders, the resources which partner with it to create value. It's profiteering from its partners! Therefore, this makes it a more insidious form of profiteering.
Does this profiteering approach serve business well? No - not at all. Proof of this is in the decline in business longevity. No imbalanced system works properly. Business comprises many constituents (or stakeholders), who all need to prosper over the long-term for business to survive. One cannot prosper at the expense of others. That’s why we need to return to the principles of capitalism, which acknowledges the importance of profit, but does not see it as paramount. It sees longevity as paramount (i.e. the continuation and growth of capitalism,) which can only be achieved through a balanced system, which looks after the needs and interests of all stakeholders.
So where do you stand on this issue? Do you support a “business as usual approach” or are you in favour of introducing a new business measurement standard? A new standard which identifies comparable non-financial measures as the key issue? Perhaps you are torn in supporting a new standard, believing the underlying principle of comparability is unattainable. I have done extensive research into this question and know a solution is possible, as business is made up of both common and unique processes, with enough common processes to provide a framework for measurement. The alternative of doing nothing, in my opinion, is untenable. When the historical spotlight is turned on our generation, in years to come, we will be known as “Generation Profiteers,” where we stood back (despite knowing of the problem) and did nothing, allowing a minority group (shareholders) to utilise resources unfairly and unjustly and destroy what we cherish.
Adrian Mark Dore
Friday, 14 July, 2017
The evils of capitalism - what nonsense.
Summary: It’s a strange phenomenon how people can latch onto an ideological concept like capitalism and blame it for the problems we face today when our business measures are directly responsible for the problems we face, yet they escape scrutiny and blame.
It beggars belief, particularly when it can be logically argued that business doesn’t even follow the true philosophy of capitalism. However, on the other hand, perhaps it’s understandable because the rich, powerful and influential need a scapegoat to hide what is actually going on, and capitalism offers them the ideal excuse.
Read this article to find out more.
Capitalism has been blamed for putting the profit objective before all else and to serving the needs of shareholders at the expense of all others. This is quite true, business does place profit before all else, and it does serve the exclusive needs of shareholders at the expense of other stakeholders, which has created serious social, environmental and economic problems. However, these are not problems caused by capitalism - they are caused by our inadequate and inappropriate business measures.
We use financial measures inappropriately as a business measure, which places the emphasis on profit creation for the benefit of shareholders, at the expense of all others. We do this because financial measures are our only comparable measures and our economy relies on comparable measures. Therefore, we will only shift our reliance and focus away from financial measures when we introduce more appropriate business measures, which provide a balanced picture, that includes all stakeholders, and are comparable across all businesses, irrespective of sector or size.
Capitalism is about free enterprise, which relies on the creation of profit to sustain it. So, while sustained profit is essential to business, capitalism does not suggest, or favour, profit generation at the expense of other stakeholders. That would be counter-productive, making long-term profit generation more difficult. This would be contrary to the objective of capitalism, which is the longevity of business. So while capitalism sees profit generation as necessary, it also sees profit as just reward for shareholders, which it is. It does not see profit as its sole objective. The longevity of business (or free enterprise) is its objective, achieved through a fair and equitable distribution of value creation amongst all its stakeholders. This is key to achieving longevity - capitalism’s objective. It is our poor business measures which have corrupted the course of business, for which capitalism is unfairly blamed.
It’s crucial that we stop all this anti-capitalism nonsense now, not only because capitalism is an effective way of helping us all prosper, and for protecting our environment, but because by always pointing the finger of blame at capitalism we hide the real problem. Let us rather divert all our frustration and anger towards the real culprit - our poor, inadequate and inappropriate business measures. Unless we do something about it, and urgently, we hurtle towards a vastly changed and unfavourable future.
I know many people will have difficulty in associating profit with environmental protection and social upliftment, but profit is not a “dirty word” and a contradiction in terms. Profit is the just and fair reward people who take financial risk are entitled to. It only becomes a “dirty word” when it’s the sole objective of business; where profit is made at the expense of other stakeholders. Profit enables a business to survive, and by the business surviving, it can fulfil its role as a societal tool. Free enterprise encourages creativity, innovation, diligence, hard work and fair play - noble qualities, which create value. This helps with the upliftment of all. It provides for all and is good for all when it functions as a balanced system. This guarantees the longevity of free enterprise, which is what capitalism is all about. This requires a harmonious balance between all business constituents, or stakeholders (which represents its sense of fair play.) However, this is all thrown off kilter when we use financial measures as a business measure. This isn’t a problem of capitalism’s making. Capitalism isn’t involved in the management of business. Capitalism describes the ideological role of business, it has nothing to do with the management of business. It is our poor management of business, over the past decades, and our indolence in not addressing a problem we have known about for decades. We haven’t just stumbled upon the problems, we’ve known about of our inadequate and inappropriate business measures for decades, but done nothing about it.
This brings me onto my next point, which involves the terms we use to describe capitalism. These either directly, or indirectly, infer that capitalism is involved, or is implicated, as the cause of our major socioeconomic and environmental problems.
“The evils of capitalism” - Capitalism expects that shareholders receive no more than their fair share of the value creation rewards of the business’s endeavours. It encourages and expects, the harmonious interrelationship between all constituents as the means to achieving longevity. It encourages the noble traits of creativeness, innovation, industrious hard work, and fair play, which leads to the upliftment of all, and the protection of what sustains us. There can be no evil in this, only something to cherish, protect and celebrate. If we believe business follows the principles of capitalism, then these principles have been so fundamentally corrupted by our inadequate and inappropriate business measures, it’s almost inconceivable.
“Inclusive capitalism” - is a confusing term as it implies that somewhere in the principles of free enterprise there are terms which exclude some from participation. This is simply untrue. There is no question about it, we do have an economy which behaves in an exclusive manner, but again, this is not of capitalism’s making. Our economy is simply reflecting the exclusions imposed upon it by our inadequate and inappropriate business measures. People (or staff), community, environment and other stakeholders are not included because our business measures exclude them. So when somebody talks about “inclusive capitalism”, what they are really referring to is the need for inclusive measures. However, it doesn’t do capitalism’s cause any good to imply that it’s capitalism which is the “bad boy” which needs reforming, as again this deflects attention away from the real cause. The more we can get people to start talking about, and naming our inadequate and inappropriate business measures as the problem, the greater the groundswell support we can bring to bear on the problem to bring about much-needed change.
“Conscious capitalism” - this is another case of a confused term, which does not serve capitalism’s cause well while professing to do so. This term implies that capitalism “is out to make a quick buck, but has no conscience as to how it does it.” Well, you and I know that’s a load of baloney. Capitalism, if understood correctly, is definitely conscious about how it generates profit. It’s certainly not about making a quick buck at any cost. It considers longevity as more important than a quick buck, and that requires being fully conscious about other stakeholders needs and requirements. How on earth they could confuse the principles of capitalism, with the poor management of business, through the use of an inadequate measure, I don’t know. We will only make business conscious, or aware, of other stakeholders when our business measures include them.
Capitalism provides the ideological framework within which business is supposed to work, but it’s up to business to apply the correct management tools to achieve these principles. Business has, in fact, not been following the principles of capitalism, although most mistakenly believe they have. Our business measurement standard, currently, cannot support the principles of capitalism, instead, it supports a form of “profiteering.” It can be argued that as our current measures do not consider the interest of others, and encourage and support the compromise of other measures to generate excessive profits or to prop up profits, this represents a form of profiteering.
It’s time for change. We need a new business measurement standard, one which can support the principles of capitalism, which is about business longevity, achieved through considering the needs of all stakeholders.
Adrian Mark Dore
Thursday, 15 June, 2017
Our parasitic business measures.
Summary: What would you do if I showed you that our financial measures, used inappropriately as a business measure, have corrupted outcomes into behaving in a parasitic manner, slowly but surely destroying business over the long-term. Understandably you may be sceptical of such a bold claim, but if proved true, then surely this will make you want to do something about it? Read the article, and let me convince you.
A parasite is described as an organism which lives in or on another organism (its host) and benefits by deriving nutrients from the host, at the host's expense. I can’t think of a more appropriate way to describe our financial measures. How they continually take value from other business constituents, slowly but surely destroying the business in the process.
I can hear some people, as they read this exclaiming - “How on earth do you arrive at this ridiculous nonsense?” Well - it’s not ridiculous, as I will explain, and yes - it’s a nonsense that we’ve allowed the situation to continue, unaddressed, for so long.
Financial measures are not inherently parasitic. We have made them that way by using them in an inappropriate manner. When used as intended, to measure financial transactions, they present no problem, but when used as a business measure, it causes innumerable problems. The reason is blindingly obvious - finance is not business, it’s only a small part of business. Financial measures account for less than twenty percent of the value creation potential of business, so using them to gauge business performance is simply ridiculous. Therefore, it stands to reason, financial measures are bound to be inadequate and inappropriate when used as a business measure.
However, because financial measures are our only universally comparable measure, investors are forced to use them as a business measure. This is what creates all the problems. In the absence of better, more inclusive, universally comparable measures, investors are forced to use financial measures as their sole business measure. This sets in motion the parasitic nature of financial measures, as I will now explain.
As already mentioned, financial measures account for less than twenty percent of the value creation potential of business. The remaining eighty percent, although measured and managed to a certain degree, are unseen by the investment market, as they are not comparable, and therefore, have little, or no value, in the market. Because they are unseen and unknown, the executive can manipulate, or compromise these measures to ensure they produce strong financials, which are seen and evaluated by the markets. Investment, executive salaries, bonuses and careers are all reliant upon producing strong financials on a sustained basis.
So, if you take value from one part of the business to make sure your financials are always strong, rather than making sure the business is strong - doesn’t that make our financial measures parasitic in nature? Markets remain oblivious to the damage done to the business in propping up financials. As I said in my introduction - financial measures “continually take value from other business constituents, slowly but surely destroying the business in the process.”
Why don’t we stop this nonsense now, and the pussyfooting around, and face the issue head-on? We need a new business measurement standard. I spend the bulk of my time trying to convince people of the urgent need to do so when I should be writing about solutions, not problems. However, there’s little point spending time writing about solutions to a problem people don’t know we have. This, despite me explaining the problem in the simplest of terms. Showing how our financial measures have been corrupted into behaving in a parasitic manner, hideously distorting business performance, which in turn sets off a cancerous growth within society, environment and economy, destroying the fabric of life as we know it. Please read my article “The cancer of our time” which explains how our inadequate and inappropriate business measures are destroying the fabric of life as we know it. We hurtle towards a life changing precipice with very few able to “join the dots” in identifying our inadequate and inappropriate business measures as the root cause of our problems. If we don’t address the root cause, we won’t change anything. If you think broad international agreements on Climate Change (e.g. The Paris Agreement) are going to be our saviour - don’t hold your breath. Until we address the root cause, this and many other problems will persist despite these agreements. It’s about addressing the cause.
When I said our financial measures are parasitic - I wasn’t talking nonsense, however ridiculous that may have sounded. Neither am I talking nonsense when I say our financial measures are the cancer of our society, environment and economy. I should stop wasting time writing about the need for a new measurement standard, and dedicate my time to writing about the solution.
In an article I wrote recently called “Misunderstandings,” I mentioned the biggest misunderstanding about introducing a new measurement standard relates to a suspicion about the underlying motive for change, where Shareholders believe their interests will be undermined, in favour of other stakeholders. This is entirely incorrect. Change is intended to benefit shareholders. If shareholders think their interests are best served by adopting a myopic financial perspective with parasitic and cancerous outcomes, it’s like them saying to their medical doctor “Don’t give me the medication. I know it will stop the cancerous and parasitic growths, but at least it will extend my life.” This is just crazy nonsensical rubbish. We need change, and it needs to serve all. The quicker shareholders realise profit growth is about healthy business growth rather than propped-up financial growth, the better.
We need a paradigm shift in thinking. We need to think about creating value for all stakeholders, and we need to be forward and not backward-looking. Our perception of business has to change. Our understanding of business has to change. For these reasons, accountants are not suited to lead this change. As a profession they have been complicit in hindering change and deflecting attention away from the harmful effects of using financial measures as a business measure, to protect their own interests. They talk glibly about being “leaders in value creation”, yet have no understanding of the subject whatsoever (as I will explain) and they make puerile attempts at broadening our measurement base, to show “we know about the problem and are doing something about it.” This is nonsense and a smokescreen for doing nothing. The accountant's glory days have come and gone as have their measures. Don’t get me wrong, we need financial measures, they are important, but only in proportion to their value creation contribution, which is less than twenty percent.
So, what does business need to do to meet its, and society’s needs?
In making sense of big complex problems like this, the best approach is to break it down into a few big questions - answer them and then break those down further and further until we find answers to all parts of the problem.
So, the first “big question” we need to ask is, “What does our new measure need to provide us?” The most important thing it needs to provide is universally comparable measures. If the measures do not apply to every business, irrespective of sector or size, just as financial measures do, then walk away from them, otherwise, they will waste your time. It is our lack of comparable measures which is at the heart of our measurement problem.
The next important thing our new measures need to provide is an all encompassing, or fully inclusive picture of business. Business processes are integrated and interrelated. Therefore, if we don’t incorporate all the components of business in our measures, we will not get an accurate picture of business performance.
The third most important thing is these measures need to be based on the principles of value creation, because, value creation is the common denominator of business. Business functions as an integrated, interrelated cause-and-effect model. Therefore, this causal model needs to be based on the principles of value creation. So, our new measures need to provide a clear understanding, or framework of the value creation processes.
This then represents the starting point
for our new measurement standard, based on answering the first “big
question” of what we need from our new measures. It needs to be:
1) Comparable across all businesses, irrespective of sector or size.
2) Fully inclusive of all business processes
3) Based on the principles of the value creation causal model.
What’s to disagree with this as the starting point? I would certainly like to hear from anybody who does.
Accounting Associations and Institutes around the world, together with all major international accounting practices, are backing a concept called Integrated Reporting, more specifically the International Integrated Reporting Council (IIRC). It’s stated objective is to communicate on a periodic basis an integrated report about value creation over time. “An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term." This is their definition of the purpose of an integrated report. How interesting. Let’s see how this stacks up with what we need from our new measurement standard.
A) Is this report comparable across all
businesses irrespective of size or sector? NO!
B) Is it fully inclusive of all business processes? NO!
C) Is it based on any understanding of the value creation causal model? NO!
This typifies what I was saying about the accounting profession earlier. They talk the good talk. They look busy doing something when in reality it will lead us nowhere. It’s a smokescreen, which detracts from the real problems and the urgent need for finding a workable solution. We cannot rely on the Accountants or their efforts - period! For this reason, I call on all open-minded, forward thinking people to call for a new business measurement standard.
Adrian Mark Dore
Friday, 12 May, 2017
Summary: Changing our business measurement standard is important, but it only addresses part of the problem, if we are looking for a sustainable and prosperous future for all. Consumers are critically important to business, as they create the demand for products and services. It is their demands which are placing global resources under enormous strain, so consumers have a critical role to play in contributing to a sustainable, fair and prosperous future for all. Inclusive Theory explains that business and consumers are in it together in making sure global resources are cared for, and work for the benefit of all.
Our understanding of value creation, particularly of who business should create value for has evolved over time.
It started with the idea that shareholders should be the beneficiaries as they provide the financial capital and take the financial risk. This made sense. However, over time concerns grew. Marketers suggested that "customer value" was important. They argued that if we do not continually increase customer value, they will go elsewhere. This also made sense. "What about employees?" argued Human-Resource experts, "they too will go elsewhere unless looked after." "What about the environment?" conjectured environmentalists. "If we continue to destroy what supports us, we have no future." They to make a good case. And so the legitimate claims to become beneficiaries of value creation grew. All claimants making a plausible and logical case for their fair share.
The facts are, there are many participants, or stakeholders involved in the activities of business, such as, customers, staff, suppliers, the community in which the business trades, the environment, as well as shareholders. If all these participants are not "looked after" their support, in the future, may be difficult to achieve. This will make future value creation for the business owners, or shareholders, more difficult. Consequently, sustained, long-term value creation is about creating value for all participants involved in the activities of business, not just one, or a group of select participants.
It's not an altruistic, or "airy fairy" social belief to suggest that all participants be rewarded fairly, but rather a common-sense approach. Adopting a short-term, profiteering mentality, of rewarding one participant at the expense of others, creates an unsustainable imbalance in our economy. When value is more evenly spread among all participants, we have a stronger economy, which leads to a brighter future for all, not just select participants.
For business to be successful, it has to create value for all its participants. You have to see business from a balanced perspective. If you only see shareholder value creation as your sole objective, then you will never achieve it as shareholder value creation is inextricably linked with all other participants. Unless you create value for all participants, long-term shareholder value creation is a wild, unattainable dream.
As obvious as this may be, we have not yet made the transition to "Stakeholder Theory" (as proposed by Edward Freeman,) away from "Shareholder Value Theory" (attributed to Milton Friedman,) which suggests the interests of shareholders be placed above all others. The reason we have not made the transition is a simple one. Our economy relies on comparable measures, so unless we are able to measure stakeholder value creation on a universally comparable basis, businesses will not make the transition. Instead, they rely on our universally applicable financial measures. While not ideal, it is argued that some comparison is better than none. Unfortunately, the use of our financial measures as a business measure has led to undesirable consequences, resulting in it becoming the root cause of our most serious socioeconomic and environmental problems. Therefore, we need to adopt the more balanced approach of "Stakeholder Theory," but this is dependent upon developing a universally applicable value creation measurement framework, which, until now, has been unavailable.
Until we develop and introduce a new business measurement standard, which will provide a balanced approach, and protect the interests of all stakeholders, we hurtle towards the destruction of our socioeconomic and environmental systems, as we know it. Because of the scale and speed of destruction, I believe "Stakeholder Theory" does not go far enough in providing a solution, hence the introduction of "Inclusive Theory", my small "tweak" on "Stakeholder Theory."
The backdrop to this theory are reports like those produced by the WWF and SustainAbility, (plus many others) who conclude that "the Earth cannot keep up with the demand our economy is placing on its ecological assets. Evidence is mounting that the sheer volume of resources flowing through the global economy has become today's key environmental challenge and as human demand for resources grows the Earth's life-supporting natural capital will be liquidated at ever-increasing rates."
If we are to address these problems there has to be a new understanding within business, and between society if we have any chance of averting disaster. Basically, we need a new social contract between business and society. Business has to function as a societal tool. It can no longer be a self-serving mechanism for shareholder enrichment at the expense of others, but rather a tool to serve all stakeholders. Critically, shareholders still need to be rewarded, (this being the primary objective of business) but not at the expense of other stakeholders. Consequently, Capitalism, or the spirit of free enterprise, remains the ideal mechanism to deliver growth and upliftment, provided it is based on balanced rewards for all stakeholders. Currently, this is not the case. This is not the fault of Capitalism. The problem lies with our inadequate and inappropriate business measurement standard, where we use financial measures as a business measure, thereby placing a financial bias on everything, favouring the fortunes of shareholders over all others.
In this new understanding between business and society, we must all accept responsibility and accountability. It's not somebody else's problem, or a case of, “I don't care,” because, the outcomes impact us all. Consequently, it's not just about business doing its bit but also about the critical role consumers and society play in business. For example, if we hold business accountable for upstream environmental/social impacts (i.e. the business fully inherits the environmental/social impacts of its suppliers) as well as being responsible for their own processing and downstream environmental/social impacts, it's only fair that the consumer picks up the upstream environmental/social impacts of the products and services they consume. If business is vilified and driven out of business because of their poor environmental/social impact, then so too must the consumer be vilified and dissuaded from using products and services with a poor environmental and community impact. Consumers are as much part of the supply chain as any business, and must, therefore, be educated into accepting the responsibility for their purchases and their impacts.
"As long as there is a demand, business will fulfil it" is a mindset we can no longer tolerate. There are consequences to this and those producing and consuming while destroying or placing resources under undue stress, must be stopped, or face the consequences. The lifestyle enjoyed by most in the first-world, and to which all others aspire are simply unaffordable in terms of natural resources. We as consumers have to take responsibility for these unsustainable consumption patterns. We have to review our consumption patterns and expectations in light of a growing population and our demands on limited and sometimes irreplaceable resources. What we demand and expect has to be tempered with these constraints. As consumers, it's our demands and expectations, which drive business, so we have a very important role to play on issues we are quite happy to blame on business. We blame them for exploiting scarce resources, pollution, cutting down rain forests and planting commercial products, but we still demand the products responsible for this. We are the ones who set up the demand which results in unethical and unsustainable practice because as long as there's a demand, somebody will try to meet it. Our role is to temper our demands and expectations and become savvier in identifying wasteful, unsustainable, polluting, unethically sourced products, etc. Products with a negative environmental and community impact need to be socially ostracised. We can't continue the way we are now; the responsibility for change lies with consumers as much as it does with business. As a society, rather than celebrate opulence, extravagance and waste, we have to learn to celebrate frugalness, product longevity, etc.... This may not sound attractive, but I know our inventiveness will come up with enticing solutions.
"We are all in it together" sums up "Inclusive Theory." It's a small but important tweak to "Stakeholder Theory." We cannot expect fundamental change that does not involve the most important component of all - the consumer, and wider society. Consumers ultimately determine demand, therefore, they need to set their expectations in accordance with realities - no unbridled expectations just because they have the wherewithal. Consumers must take responsibility for their consumption and not attempt to pass it back upstream. It's not the large corporations chopping down forests to replace them with palm oil plants, or huge beef herds, but rather the consumer because the consumer creates the demand. Consumers must temper their demands based on all the good principles we expect business to uphold.
Consumers also have wider responsibilities to ensure all businesses (even those they have no relationship with) act responsibly, thereby ensuring we all keep a watchful eye over the most important social asset of all - business. We are all accountable and responsible.
Adrian Mark Dore
Friday, 14 April, 2017
Summary: I’m the vociferous voice calling for a new business measurement standard, and for good reason. However, in making that call, many people get the wrong end of the stick. They think I’m a socialist or environmentalist, hell bent on getting business to serve everybody else apart from its owners, the shareholders.
Nothing could be further from the truth. I know how important it is to look after shareholder interests, but I also understand that serving those interests is not achieved through adopting a myopic financial perspective of business. It’s best served when business takes a broader, all encompassing perspective of all its stakeholder needs. It’s our myopic, narrow financial vision which is riddled with many basic misunderstandings, which this article addresses.
I have been at great lengths to explain we need a new business measurement standard. I’ve called our current measurement standard the “cancer of our time,” because, it is. It’s aggressively eating away at the fabric of life by supporting and encouraging the exploitation of planetary resources, for the benefit of a few. It’s driving us to the brink of a vastly changed, and less favourable place for many. Extinction for some. Only when we make business accountable to all stakeholders, who represent these planetary resources, to deliver value to them, for their participation in business processes, will we create balance and prosperity for all.
So, while I’m calling for a fairer distribution of the spoils of business, it may appear that I’m, anti-business and shareholders. That’s the first MISUNDERSTANDING. In fact, the well-being of business should be our primary concern. This is because business is at the centre of life. We need business to prosper over the long-term, to help everybody - it’s the engine of our society. However, it would be naive and ignorant to believe that the interests of business can be achieved at the expense of other stakeholders. Business interests are best served through providing mutual benefit to all stakeholders. Who reading this article believes that a “give and take” approach is a load of baloney? If so, don’t bother reading any further.
While we acknowledge we have to look after all stakeholders, we must also acknowledge that our first and most important priority is to look after business itself. It’s like saying you must look after your family, friends and community, but that all starts by looking after yourself first. Unless you are strong and successful, you can’t help your family, friends or community. In fact, you become a burden to them. Without strong business, we don’t have a strong society. Therefore, looking after business must be our primary objective.
Business is an inanimate entity, so who represents business? Shareholders are the owners of business, so shareholders are synonymous with business. Therefore, our primary objective must be to look after shareholder interests. That’s what our current measurement standard does - it looks after the interests of shareholders, so why change it? This leads me onto my second MISUNDERSTANDING. Looking after shareholder interests is definitely not synonymous with taking a narrow financial perspective of business performance. Looking after all aspects of business is what serves shareholder interests best. That’s where my journey of discovery started over twenty years ago. I saw that business needs were not being met by our current measurement standard, and so, I started looking for something better. Others were of the same opinion. This saw the growth of ideas like the Balanced Scorecard (BSC). The BSC tried to provide a balanced perspective of business performance. While I heralded the idea of a balanced perspective, I never supported the BSC, as it failed our most elementary requirement for a measurement standard.
This failure leads me onto my next MISUNDERSTANDING. For any measurement standard to be successful it has to be universally applicable, where results can be verified and compared across all businesses, irrespective of sector or size, just like financial accounts are comparable. The developers and promoters of the BSC failed to understand and appreciate this elementary requirement, and as a result, the BSC fizzled out, just as developers of Integrated Reporting are failing to recognise the same requirement.
Many will respond by saying, “It’s impossible to have a universally applicable measurement standard as all businesses are unique. How can you compare a steel manufacturer with a shoe retailer - the businesses are vastly different?” “One size does not fit all.” Well, that’s my next MISUNDERSTANDING. Firstly, our financial measures are universally applicable, so how’s that possible if business is unique? The fact is, business is made up of both common and unique processes. At a conceptual level, all businesses are identical, but at a micro-operational level, we find all businesses are unique, even within the same sector. If you can think of business processes as a triangle - the top represents the conceptual level and the base the operational level. If you draw a line midway between the top and bottom, the top half represents common processes and the bottom unique processes. Information percolates from the bottom up, so eventually, all information ends up in the common process section. If the cut-off point between common and unique processes provides sufficiently adequate common process to provide meaningful understanding of business performance, then that’s all we need for a universally applicable measurement standard. Fortunately, research has revealed that business shares enough in common, across all facets, to support a universal measurement standard.
The need for a broad perspective of business performance, is critically important. The introduction of the BSC way back in 1994, was as a result of business crying out for a better understanding of performance. Business needs a window into how it’s doing across all facets of business. The idea of measuring and managing these different facets, or perspectives (as the BSC called them) was, therefore, appealing. It showed a realisation that financial considerations, although important, only represent a small part of the wider picture, and that these other facets of business are important and need to be measured and managed. It is estimated that financial measures account for less than 20% of the value creating potential of business. That means that 80% of business is not measured or managed effectively (i.e. not comparable with other businesses.) The eventual demise of the BSC had nothing to do with its failure to measure and manage different perspectives. It failed because its measures were not universally applicable. Its measures had little or no relevance outside the business. The outside world was only interested in measures they could compare - financials. So, although internal BSC measures would suggest a certain course of action, these were ignored in favour of financial measures because these were the only (external) measures they would be judged on. Bonuses and careers depended on continually producing “good financials”, despite what the BSC measures may recommend. It became an exercise in futility measuring things you would not action - being forced to follow financial measures, despite knowing them to be counterintuitive. Living under the shadow of financial measures led to the impotence of the BSC. Any measure not universally comparable will live under the shadow of financial measures and be treated as useless, and as a consequence, will die away. Non-financial measures are compromised to ensure strong financials.
All the initiatives to address the inadequacies of our measurement standard have been directed at large corporations, and yet the reality is, SMEs provide the backbone to our global economy, and are likely to play an even bigger future role. So the next MISUNDERSTANDING is that the solution we seek has to be practical and applicable to all, particularly SMEs. The solution isn’t just for large businesses - we need a universal solution. We must also appreciate that while it’s critically important to provide new measures, these new measures also need to provide another benefit. It needs to provide a framework, or road map, on how business goes about creating value to meet the long-term value creation needs of all its stakeholders. It’s important for SMEs to have this “roadmap” as they often can’t afford the multi-disciplinary experts a business requires. This will help increase SME longevity, which is poor. Business success and longevity is important to all of us.
The reason people focus on large corporations is because they believe the solution to be complex and difficult. It’s this belief, which leads me onto my next MISUNDERSTANDING. At a conceptual level, the solution to our measurement problem is simple and straight forward, not complex or difficult. This is not surprising as it has to apply to all businesses, from the smallest to very largest. Just like our Accounting Model applies to the biggest and smallest. Conceptually, all businesses are the same, but with size comes complexity. It’s not surprising people see complexity in business, but when all its complexities are pared back to reveal the basic components and relationships of the value creation causal model, it’s strikingly simple and logical.
No matter who you are - an environmentalist, deeply concerned about global warming, habitat destruction, or species extinction. A social reformer or worker concerned about lack of community investment, worker exploitation, poor wealth distribution. Perhaps you are concerned about financial and economic systems not serving the broader community, or about sustainability issues. No matter if you have social, environmental or economic concerns, here’s the BIGGEST MISUNDERSTANDING you need to come to terms with. Put your concerns aside for a moment and make business needs your first priority. If we can get business to change because their needs are met, they will jump at change. Then, and only then will the position change for other stakeholders. If you don’t get business to change, then whatever you do is going to have, at best, a marginal impact, because the cause remains. Remember, we are talking about a business problem. One which affects us all. In providing business a workable solution, all others will be provided a solution. I know it may seem strange to say, “look after the fat cats first,” but unless we do, they won’t shift their position. Remember, it’s not a “them and us” situation, but one of working together co-operatively. Business is a hugely important societal tool - we must ensure it lives up its promise through an effective measurement standard, and not have it destroy society as it is doing right now through an inadequate and inappropriate measurement standard.
Adrian Mark Dore