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. ***
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
*** You may reproduce this article provided you acknowledge Adrian Mark Dore as the author and make reference to this website. ***
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
*** You may reproduce this article provided you acknowledge Adrian Mark Dore as the author and make reference to this website. ***
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
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
Friday, 03 February, 2017
The cancer of our timeSummary: This article tries to put the damaging effects of our inadequate and inappropriate measurement standard in perspective. To help the average person realise this is not some remote problem which has nothing to do with them. It has everything to do with all of us. If we allow this cancer to continue unchecked, it will unquestionably, adversely affect your life and that of your family.
When we use the word cancer, most people think of it in its biological form. However, how it works, and the outcome it produces, are similar to a broader, life-threatening form of cancer. This form of cancer poses a greater threat to all life, and represents the cancer of our time. I call it “life cancer.”
Both forms are silent, insidious destroyers of the fabric of life. With physical cancer, we are fully aware of the problem and direct considerable resource towards its understanding and cure. With regard life cancer, we have not fully identified and acknowledged the problem, and, therefore, are doing nothing to address it.
While physical cancer is sometimes terminal, thankfully, we can no longer classify it as a threat to the existence of life, due to the great advances made in medical science. With life cancer, the threat to life, not just human life, is inestimably higher. Furthermore, it not only threatens life but also to change the nature of life unfavourably, across a broad spectrum. To compound the problem even further, we have limited time before we reach the tipping point - before we “Cross the Rubicon” of life. Where life as we know it will change irreparably.
The problem I refer to affects every aspect and facet of life. It adversely affects society, the environment, economy and business. In fact, it is the root cause of our most serious social, environmental, economic and business problems. It affects you and your family directly and indirectly, although you are probably oblivious to its negative effects.
This hidden, insidious problem stems from using an inadequate and inappropriate business measurement standard. It may seem strange and over dramatic to think of it as the cancer of life, but the way we measure business has a profound effect on life. Business is at the centre of life, affecting society, environment, and economy. Our measurement standard has a direct and major impact on all these constituents. It can change, enhance or destroy life. As our measurement standard focuses on a single objective, namely the pursuit of profit and enriching shareholders, that’s the results we’ve been producing for decades - at the expense of everything else. We destroy the environment such as The Great Barrier Reef, the rainforests, and are responsible for global warming, plus the extinction of species on a grand scale. We distribute wealth unfairly and create economic systems, which serve the few at the expense of the many, all in pursuit of profit and shareholder enrichment. Underlying and supporting all this is our inadequate and inappropriate measurement standard. The evidence to support these claims that our business measurement standard is the root cause of our most serious social, environmental, economic and business problems is overwhelming. These claims all make perfect sense - every imbalanced system causes unpleasant and unwanted side effects. Our measurement standard is horribly imbalanced, producing serious unintended consequences.
It is the cancer of our time, eating away and destroying the fabric of life as we know it. Left unchecked it will destroy us as assuredly as any untreated cancer kills.
Some may say that we have acknowledged the inadequacies of our measurement standard and are attempting to integrate it with other measures to provide a more balanced and less harmful approach. The reality is, they are adopting the wrong approach, and will never provide the solution we need. The reasons I say this will become apparent as I explain the problem further.
What we need is a new paradigm. Using our existing systems and understanding is like using a 16th-century physician’s knowledge to treat a modern cancer sufferer. It’s simply inadequate and inappropriate. Our five-hundred-year-old accounting model may have served us well during the industrial revolution, but now it’s well past its useful shelf-life. We need to rethink the solution because the evidence before us strongly suggests that taking disparate measures and integrating them cannot solve the problem. This is because we must base our solution on a clear understanding of the situation, and realities, as we know it.
What we know is that business comprises different parts (or constituents.) These parts are integrated and interrelated in a cause-and-effect model. The success of business is dependent on all constituents benefiting from their mutual association. Therefore, to ensure business achieves its objective of serving all constituents, we must understand this integrated causal model. We also know that value creation is the common denominator of business, that all constituents expect their association to be rewarded through the growth in value of what they contributed to the association. Consequently, the causal model must be based on the principles of value creation. So, while we need an integrated solution, we cannot achieve this by cobbling together disparate measures, which are not based on any understanding of the value creation causal model, which drives business success.
The process of change starts by recognising the need for change. We then need to acknowledge the urgency for change, and thirdly, we need to agree on the broad framework upon which to base this change.
Unless we change, and urgently, this cancer will continue its unabated destruction of the fabric of life as we know it. Life will change (unfavourably for most) and will drive many species to extinction because good people like you did nothing about it, despite being aware of the problem. You can do something about it by adding your voice to the groundswell demanding the problem be effectively addressed. By that, you are doing something positive.
If you need any convincing that our measurement standard is at the heart of our most serious social, environmental, economic and business problems, then ask for the proof, but don’t brush it aside. I can provide all the proof and evidence you need. Remember, this affects you and your family’s long-term well-being so you need to take action now. You have a duty to act because the rate at which we are destroying and consuming is UNSUSTAINABLE. Bear in mind that this rate will increase rapidly soon due to population increase and the shift of major 3rd world economies to 1st world economies. A bad situation is going to get worse.
If you also think that “supportive reporting,” such as Corporate Social Responsibility (CSR) is helping, then think again. We’ve been using CSR reporting for nearly three decades, and its made no marked difference. There are many reasons why its made little or no difference, and why it never will. By cobbling a failed system onto a bad measurement standard is enough of a clue as to its likelihood of providing a solution.
We need measures.
However, we definitely don’t need bad measures - they lead to bad outcomes. Our social, environmental, economic and business problems are a direct result of these bad measures.
We need more balanced measures.
Measures which ensure all constituents (or stakeholders) benefit through their association.
These measures need to be based on an understanding of the value creation causal model - the driver of business success.
Let’s not forget that businesses still need to be profitable to survive and prosper over the long-term and that this is essential for a prosperous life for all, provided it’s not achieved at the expense of other stakeholders. Profit and capitalism are not the enemies - a bad measurement standard is.
However, having said all this, let’s be realistic. Our current measurement standard serves the needs of a few. These are rich, powerful and influential people, who pay lip service to change while ensuring nothing changes. We have known of the problems caused by our inadequate and inappropriate measurement standard for decades. We have known for decades that business operates as a causal model. We have also known that we need to create value for all constituents to optimise long-term growth and success. So, despite knowing we have a problem and having identified key components for a solution, and with the massive resources of business behind us, why have we done NOTHING? Vested interests. If the current system serves you well, why change it? Why concern yourself with the well-being of other stakeholders when you can amass profits for yourself? ”Let the cancer keep eating away as long as I’m okay, why worry?” This is the attitude adopted by most of the rich, powerful and influential.
It is for this reason, we need to build public support to highlight the problems and dislodge vested interests from blocking change. Start calling for change right now.
By using current measurement standards, businesses around the world will do whatever they have to, to make a profit as that’s their sole measure of success and their objective - everything else is off the radar and doesn’t matter. They will abuse the environment, their staff, the community and keep in place systems protecting their interests. Profit before everything else destroys. It even destroys those who believe in it. This cancer must end, and it starts with you and your support.
Adrian Mark Dore
Friday, 06 January, 2017
We need a new measurement standard.
Summary : The reason we need a new business measurement standard is simple - our current standard isn’t serving our needs properly. In fact, it’s hurting and holding business back. It doesn’t even serve shareholders well, despite many believing this to be true. If you hurt or hold business back, then surely you hurt shareholders?
From a broader society perspective, it’s the root cause of our most serious social, environmental and economic problems. There’s a simple logic to follow here, if you hurt, harm, or destroy the environment or people around you through your activities, then your future trading conditions are going to get tougher and tougher, until you can’t operate anymore. By looking after your broader trading environment, you make it easier for yourself in the future - that’s business sense. It’s also about being morally responsible and doing the right things. Furthermore, it’s a well-established fact, on our current trajectory, whether it’s social, economic, environmental, or business it's not looking good. We have to change and it starts with our business measures.
Why do we need a new business measurement standard?
From a business perspective, our current
measures inhibit growth. From a wider society perspective, it is the
root cause of many of our most serious social, environmental and
Reasons enough to change!
The business perspective.
Accountants are the first to admit the inadequacies of their financial measures, making it an inappropriate business measure. This immediately highlights the distinction between finance and business. Finance is not business - it’s only a small part of business. In fact, it makes up a very small part. It is estimated that financial measures account for less than twenty percent of the value creation potential of business.
Of course, that does not mean we don’t measure and manage the remaining eighty percent. What it does mean is that every business implements their own interpretation of what and how they should measure. These measures are not comparable and therefore of little value to investors.
This creates a major problem. No matter how good these other measures are, they will be compromised, thereby weakening the business over the long-term. Let me explain...
Business needs investors, and investors need comparable and reliable measures upon which to base their decisions. Only financial measures meet this need as only they are universally comparable across all businesses (irrespective of sector or size.) That means businesses are compelled to produce strong financials (if they are dependent on external investments, which most businesses are.)
Non-financial, internal measures, no matter how good they are, are inconsequential externally. As a result, internal measures are often compromised to achieve strong financials. Businesses make decisions they know are counterintuitive (based on their non-financial measures) in favour of producing strong financials. Not only investments but executive salaries, bonuses and careers are dictated to by financial results (our only comparable measures.)
So, while we have non-financial measures, they are of no value to investors as they are not comparable nor verifiable. We provide investors with financial measures, which are limited and often misleading as they are often bolstered by compromising non-financial measures. This does not serve the long-term interests of investors, and it certainly does not serve the long-term interests of business.
Both business and investors need to gain a broader and deeper insight into the long-term value creation potential of business. This will foster a true “investment culture” amongst investors, rather than promote a “commodity trading mentality,” which prevails (i.e. shares are simply a commodity.)
Business desperately needs a structure to guide it in optimising its full value creation potential. A structure which will support a universally applicable measurement standard, thereby ensuring its measures are not compromised by financial measures. Where its measures can stand on equal ground, and not in the shadow of financial measures.
This structure will be very useful to SMEs as a roadmap to value creation. SMEs don’t have the ability to employ specialists in every field, so they require greater guidance and support. This structure will provide that. We must not lose sight of the fact that the backbone of our economy is made up of SMEs and that in the future, they are likely to contribute even more. This important sector is often the last to receive any attention, as it isn’t fertile ground for large management consultancies.
In summary, business growth is hindered in large businesses by adopting a short-term financial perspective to attract investment, meet shareholder profit objectives and guarantee executive salaries, bonuses and careers. Non-financial measures are easily and readily compromised to strengthen financials, as non-financial measures are unseen. Executives can “rob Peter to pay Paul,” weakening the business, while markets applaud them. Patting them on the back as they increase their salary and bonus. All this, while unbeknown to them, the business has been seriously weakened. It’s much easier to create profits when so much can be hidden.
In smaller businesses, it hinders growth because we have not provided them with a value creation roadmap. These are businesses, which can’t afford to employ experts in all fields. Often it’s only one or two individuals who have to “wear many hats.” They need a structured approach to assist them. Furthermore, because our current measures only focus on financials, the long-term value creation prospects of smaller businesses are hidden. As a result, they are excluded from investment opportunities, because investors have no comparable and verifiable means of assessing potential. Lack of access to suitable investment is one of the biggest reasons for hindering growth in this very important sector.
The society perspective.
We give business free access to resources, yet they are only accountable (within the limits of the law) to their shareholders for profit. How wise is that?
I would suggest it’s reckless in the extreme, particularly as we have just learnt how businesses, through their executive, are quite prepared and willing to compromise facets of their own business in pursuit of strong financials. What chance do external resources, such as the environment and community have in being treated fairly and wisely, when short-term self-enrichment is the order of the day? None whatsoever! The collective proof of this is all around us. I have written extensively about it, as have many others. (Please read the other articles on my blog concerning these matters.) I will not labour the point further here, but rather move on to address objections others may have in defence of doing something about it.
Some may say that for the very reasons mentioned above, CSR (Corporate Social Responsibility) reporting was introduced. I will be the first to acknowledge the noble intent and work done by many in this regard, but also condemn it as worthless, in the same breath. CSR has been with us for over two decades, and it hasn’t made any difference. The reason it has made no difference is not because its intentions are flawed but because of the way it has been implemented.
This brings me back to our core problem. Unless you have universally comparable measures, they have no relevance in the market and are ignored. CSR is just one of the many other internal (non-financial) measures a business has. Like any other internal measure, they are often compromised or manipulated, to produce strong financials. Right now, CSR reporting is nothing more than a PR farce, which corporates use to manipulate, painting a rosy picture of themselves, in the hope of bolstering investor and consumer confidence. Volkswagen is a classic example. They were just unlucky that they got caught lying. Others have been more fortunate, yet are no more sincere or responsible.
In 1994 the Balanced Scorecard (BSC) was introduced, to help provide business with a more balanced perspective of performance. It was well received because even then, business acknowledged the need for a more balanced and informed approach to managing business. Today there are very few followers, not because what they suggested was wrong. To the contrary, it’s better than what we’ve got today, but again, its measures were not universally applicable. They represented just another set of internal measures. Like all internal measures, they fell under the shadow of financial measures and were compromised. Slowly, but surely, their relevance waned. The same for CSR - the same for any, and every internal (non-financial) measure.
Towards a solution.
In light of the obvious failings of the Accounting Model as a suitable business measure, accountants are supporting a concept called IR (Integrated Reporting.) More specifically, they support the IIRC (International Integrated Reporting Council.)
There’s no question - we need an integrated solution. We need to integrate the interests (and measures) of all stakeholders, in a new measurement standard. We need a balanced approach. It’s how we go about achieving this, which poses the big question. Our new measurement standard needs to be based on the realities of business. The realities of business would indicate that our measurement standard needs to be based on the value creation causal model. Why? Because we know all components of business are integrated and interrelated in a cause-and-effect model. We also know that value creation is the common denominator of business. We also know the structure, and therefore the measures, need to be universally comparable.
The question is, does the IIRC’s approach embody these business realities? No, they don’t. It’s based on the “Six Capitals” model, which in no way resembles the value creation causal model. They talk glibly about value creation, but their approach in no way explains how business goes about creating value for all its stakeholders. If value creation for all stakeholders is important, then surely you explain how this is done. This is what we need - but it’s not what we get. We want to see a structure - a roadmap of how business creates value for all stakeholders (like the Du Pont model demonstrates the financial components which affect ROI (Return On Investment.))
The IIRC has no understanding of the value creation processes. Therefore, they cannot provide the structure, or measures necessary, to conform to our basic requirement of being universally comparable. As a consequence, their measures will be no more useful than those of the BSC and CSR. We are wasting time and resources on the IIRC.
I have spent over twenty years understanding how businesses go about creating value and investigating to what extent these processes are common across all businesses. I believe my work provides a strong basis for a solution. It provides the components, structure and measures, which are universally applicable. To learn more, please contact me.
Adrian Mark Dore
Thursday, 17 November, 2016
Problems with our business measures.
Summary: We have known about the problems with our Accounting Model for well over two decades. In fact the problems were first highlighted way back in 1987 in a book called “Relevance Lost” by Thomas and Kaplan. So, in reality, we have known of the problems for three decades, but perhaps it took a few years for this to sink in. However, it doesn’t explain why thirty years on we still haven’t addressed them. Do you think vested interest has anything to do with it?
We’ve known the following about our Accounting Model for the past thirty years:-
1. It does not provide the correct
The Accounting Model measure less than 20% of business’s value creation processes. This assertion is based on the discrepancy between Book Value (i.e. the value ascribe to the business by the Accounting Model) and Market Value (the value ascribed to the business by the market.) The difference lies in what Accountants refer to as “Intangible Assets”; assets they cannot measure. Put simply - we cannot measure the vast bulk of business value creation potential. Businesses do measure non-financial aspects, but because we cannot compare these measures with other businesses, they are not consider as useful by the investment market, as comparison is critically important.
2. It masks value creation activities,
hindering long-term growth.
There is no relationship between financial profit and value creation. We all know it's possible to make a financial profit yet destroy value, and we also know it's possible to create underlying value yet show a financial loss. So, from this we can conclude that there is no correlation between financial profit and value creation. Financial profit masks value creation activities, yet it is these value creation activities that build underlying business value, which supports and sustains future profit. So while it's important that we measure financial performance, it's equally important that we measure value creation activities, unless we want to be “lead up the garden path” by financials.
3. It measures inappropriate things
while ignoring what’s important.
The Accounting Model never set out to explain "how to play the game but only how to keep the financial score," so it's totally inadequate in even identifying, let alone ascribing value to critical value creation components within the business. Consider how the Accounting Model ascribes value to the business (or what it calls “book value”), which is made up of such things as property, photocopiers, tables and chairs, etc. Yet the most valuable assets, which drive value creation, are absent, such as:
- Ability to create or influence market demand.
- Ability to meet demand.
- Ability to optimise demand.
- Supply Chain opportunities
- Staff skills, knowledge and motivation, etc, etc…
4. It has a negative effect on economic
It may be difficult to appreciate that a measurement model that's been with us for hundreds of years and used extensively by all of us and accepted by most as being “the language of business”, is, in fact, potentially a wealth inhibitor or destroyer; but the facts are clear enough.
4.1. Responsible for a deteriorating
risk / return investment profile.
As the Accounting Model cannot provide investors with sufficient and useful information upon which to base their long-term investment decisions, they are at greater risk of ineffectively directing resources in our economy. Measurement standards have not changed to meet the needs of fiercely competitive and rapidly changing markets. Investment risk has therefore, increased (as full knowledge and understanding of the investment is unknown.) This has, to a large degree, promoted our “casino investment” mentality. Without knowledge you are investing “blind”, so you may as well push it to its limits.
When considering the investment issue, we must not overlook the enormous difficulties facing management in making internal investment decisions. On what basis does management decide to invest in the so-called "Accounting Intangibles," which make up more than eighty percent of business value? Financial models can only be used to evaluate financial results; they cannot tell you where we should invest, which is the most important decision of all. Without a method for quantifiably identifying investment opportunities within the murky depths of the "intangibles”, the probabilities of investing in the wrong projects increases substantially.
4.2. Impedes economic growth.
We encourage "strong financials," because it’s our only comparable measurement standard. This is often achieved at the expense of the value creators (which are not represented in the Accounting Model.) For example, outlays on R & D (Research & Development) represent investments in potential new income streams, which should generate revenue well into the future. However, the Accounting Model treats R&D expenditure as an expense. This lowers the profit, so to appear profitable the investment is stopped or reduced. This impedes long-term growth.
4.3. Misdirects critical, finite
The consequence of being unable to determine accurately business performance and underlying value, together with a short-term profit focus, means critical, finite resources (i.e. financial, people, materials and the environment) are being ineffectively employed in our economy; scarce resources are being ineffectively directed.
4.4. Financial data can be highly
We live in a world of constant change; what relevance can you ascribe to myopic, one-sided, historical financial data? Business needs insight, not limited hindsight.
4.5. Helps promote boardroom and
The dominance of the Accounting Model has lead to another disturbing phenomenon. Boards are predominantly composed of those with financial backgrounds, to the exclusion of those with marketing backgrounds. This negatively impacts strategic direction, imposing a visionary bias on the business.
4.6. Dominates all other measures.
Because our Accounting Model is our only universally comparable measure it is used as a business measure (as our economy needs comparable measures.) This means businesses, through their executive, are quite prepared to compromise non-financial measures to ensure they achieve strong financials. This is extremely harmful to a business’s long-term value creation prospects.
5. Supports a "profiteering" approach.
As a financial measure, the Accounting Model is good as it focuses on profit creation for shareholders, but as a business measure it’s entirely inadequate and inappropriate. Finance is not business. This is demonstrated through the fact that it measures only 20% of the value creation potential of business. The problem, however, is that it focuses business on short-term profit generation for the exclusive benefit of shareholders. This by definition makes it a profiteering system. Any system which unfairly favours one party over others in the creation of profit means the favoured party is a profiteer. A measurement standard which excludes others and provides shareholders unfair advantage, makes them profiteers.
6. Promotes inequality within society.
As business is short-term profit obsessed, for the exclusive benefit of shareholders at the expense of other stakeholders, It directly contributes to a widening rich/poor divide. This serves nobodies long-term interests well.
7. It provides limited management
To be fair to our Accounting Model - it's perfectly good at measuring financial results, the task for which it was developed. We can hardly blame it for it’s inadequacies and inappropriateness in measuring tasks for which it was not intended. When change is limited, past performance is useful in predicting the future, but today change is rapid and relentless. Our focus has to be on the future. We have to anticipate and respond to the dynamics of our rapidly changing markets. We cannot use the Accounting Model for this purpose. We have to understand and measure the value creation processes to give us a clear insight into possible future performance.
8. Linked directly as the root cause of
our most serious social, environmental, economic and business problems.
Business is given free access to global resources, but they are only accountable to their shareholders to make a profit nothing else (within legal limits.) 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. We can directly link poor business behaviour to our most serious social, environmental, economic and business problems. Some of these problems have been mentioned above, but not all. The point is, our inadequate and inappropriate business measures (i.e. the Accounting Model) is the root cause of our most serious problems. Capitalism has been getting stick for these problems, but the reality is that’s it’s our inadequate and inappropriate business measurement standard at fault. What a mess.
The bottom-line is - we need a new measurement standard and we need it now.
Adrian Mark Dore.