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
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