Friday, 03 March, 2017
The great cover up.
Summary: We’ve known about the devastating effects of our inadequate and inappropriate business measures for decades. We have the resources and ability to address the problem, so why have we done nothing about it?
Vested interests. A few will reap huge profits from exploiting resources at the expense of the many. These are rich, powerful and influential people, who don’t care, as long as they amass huge profits. They pay lip service to change and to protecting the interests of all, while ensuring little is done about it.
It is for this reason, the shortcomings of our measurement standard must become public knowledge, and the need for change understood, because only then, can they no longer hide the fact that our systems serve them alone. We need businesses to survive and prosper over the long-term, but not at the expense of everything else.
We have a problem - a serious problem. It stems from our use of our inadequate and inappropriate business measurement standard. I call it the “cancer of life.” It’s the root cause of our most serious social, environmental, economic and business problems, and it's eating away at the fabric of life as we know it. It will eventually destroy us as assuredly as any untreated cancer kills.
The problems it causes manifest themselves everywhere, because, they affect every aspect and facet of life. It affects you and your family. You may be aware of some of the problems, but not all of them, and until now, you were unaware of this common, underlying root cause.
To you, this is a revelation - something shocking you have just learnt about. Unfortunately, this is not a new revelation. Business has known of the problem for many decades, but despite this and their massive resources, they have done NOTHING about it. The reason is simple - they have a vested interest in maintaining the status quo. Currently, business is accountable for very little - they are accountable to their shareholders for profit, nothing else. They are not accountable to anybody else for anything else (within legal limits) despite being given use of the planet’s resources. Provided they make a profit (which is measured and compared with other businesses) everything else is off the radar, so how they mistreat or abuse these resources is unknown. What we know, is that collectively, these resources have been mistreated, abused and in some cases destroyed or irreparably damaged, to shareholder’s exclusive benefit. This is the problem of using a one-sided, imbalanced measurement standard, which serves the needs of a single constituent when there are many to serve.
The extent of mistreatment, abuse, destruction or irreparable damage is all around us. Think of the following, all victims of unchecked, badly managed businesses. All resulting from our inadequate and inappropriate measurement standard. This is a small list, of a huge indictment. We can link all directly to the problem:-
- The Great Barrier Reef - coral bleaching (global warming.)
- Rainforest destruction - cattle grazing and palm oil production.
- Ice cap melting - global warming.
- Mass extinction of species - habitat destruction and pollution.
- Rampant consumerism - issues of sustainability.
- Worker exploitation.
- Rich / poor divide increasing.
- Community resource depletion.
- Economic instability.
- Poor investment systems.
- Business longevity in decline.
All I’ve done is take a few key problems from within society, environment, economy and business and shown the effects. As already mentioned, the list is substantially longer, with equally alarming and distressing facts.
You may have heard of some, or perhaps all of these problems, but have you ever heard our inadequate and inappropriate measurement standard linked as a possible cause? NEVER! That’s because attention is deflected away from the real cause, to protect vested interests. This is the great cover up I refer to in this article.
They blame capitalism, big business, and the profit objective as the cause of our problems. Yet the reality is, profit is the reward shareholders receive for taking risk. Profit is perfectly reasonable and legitimate. Businesses need to be profitable over the long-term to reward shareholder risk. Profit is not a bad thing - it’s essential. It’s only “bad” when it’s business’s sole objective, and profit amassed for shareholders at the expense of other stakeholders. Rewarding all business constituents, or stakeholders guarantees business success. If not rewarded, stakeholder contribution in the future will be more difficult to enlist, and so the business will struggle to make a profit over the long-term. Blaming capitalism is equally absurd. Capitalism is about free enterprise. It acknowledges the need for business to create a profit to survive and grow; this is not unreasonable. Capitalism's objective is its growth through the longevity of business, which cannot be achieved through ingnoring the interests of other stakeholders. So, it does not support profit generation at the expense of other stakeholders. Capitalism is not the problem - our imbalanced measures are. Big business is as much a victim of an imbalanced measurement standard as everybody else, forced to adopt a short-term financial focus. Everything keeps pointing to one cause - an imbalanced measurement standard.
However, let’s be clear on another issue, our financial measures per se are not inadequate and inappropriate. To the contrary, they are good measures. It is when we use them inappropriately that they become just that - inappropriate and inadequate. There's more to business than just financial measures. In fact, financial measures account for less than twenty percent of the value creation potential of business. Consequently, we do not effectively measure and therefore manage the remaining eighty percent of business. Our financial measures distort outcomes in favour of shareholders, to the disadvantage of all others. However, because it distorts outcomes so badly, it doesn't even serve shareholders well. Proof is in the decline of business longevity - the lifespan of a business is becoming rapidly shorter. Business failure does not serve us well. Business has a vital role to play in society, provided business plays its societal role of serving all constituents well.
The quicker we acknowledge the problem the better. Like any cancer - early diagnosis saves life. By making others aware of the problem, you are adding your voice to the groundswell calling for change. We need to circumvent the rich, powerful and influential people whose vested interests in destroying natural resources, exploiting people and hoarding wealth for themselves must be shaken.
In calling for change we need a plan. We cannot suggest we discard something without recommending what should replace it - so what do we need?
In essence what we are looking for is a measurement standard which supports good governance, where business is accountable for looking after the interests of all its stakeholders. While we hear from the corporate world that they take their social responsibility seriously, the reality is entirely different. The reason being that we have no measurement standard that enables us to measure and compare business performance across all facets of business using a universally acceptable standard. It all comes down to measures. Only when our measurement standard incorporates measures for all stakeholders, in an integrated, universally comparable standard, which can be audited and compared, will good governance become a reality. Right now it's a PR farce, where corporates construct reports to project a favourable image, irrespective of what lies beneath - ask Volkswagen and others about it.
We must base our new measurement standard on an understanding of how business functions. So, let’s quickly refresh our memories on the matter. Business comprises different parts. These parts are integrated and interrelated in a cause-and-effect model. The purpose of business is to create value for all stakeholders, so we should base the business causal model on the principles of value creation.
Given the above understanding, we can conclude that we need an integrated measurement standard, based on the value creation causal model. The measures need to be universally applicable and comparable, as comparison is the cornerstone of investment. Results need to be auditable and verifiable.
However, the accounting fraternity base their proposal on cobbling together the Accounting Model (the source of our problems) with CSR Reports (a failed reporting system.) These are two disparate measures, not based on any understanding of the underlying value creation causal model. Collectively, the outputs are not universally comparable. Neither does their proposal incorporate all stakeholders interests. They fail all the requirements for a new standard.
So we’ve still a way to go in getting a working solution, but it all starts by acknowledging we have a problem in the first instant. When problems (such as global warming or other environmental or social problems) are raised, we must be vocal in pointing out the underlying cause, because, until we get sufficient groundswell support, vested interest will block change and you and I will suffer the consequences. So please join the fight for change and stop vested interests from hiding the real cause of our most serious social, environmental, economic and business problems.
Adrian Mark Dore
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