This is part-one of a four-part series of blogs by our January Guest Blogger, Paul Barnett, that will be followed by a live event to further explore and discuss the issues raised. It deals with the weaknesses in the way we think about and define value and, in how we measure and account for it. It then briefly explains some of the consequences for investment decision making, particularly in relation to innovation and in the kinds of innovation associated with major projects. It suggests that Valueism be used to reframe our thinking and address weaknesses that are negatively impacting productivity and levels of prosperity.
Oscar Wilde famously said we “understand the price of everything and the value of nothing”, and as recently as November 2018 the annual gathering of management thinkers, the Global Peter Drucker Forum, was reminded of this by Martin Wolf, the chief economics correspondent at the Financial Times. He stressed, “price does not equal value”, adding, “If you want to question that, just think about water for a few seconds”. My colleague makes a similar point when he speaks at conferences, using a roll of toilet paper as his prop and describing various situations that may influence its value.
It has been said many times, Gross Domestic Product (GDP) or Gross National Product (GNP) are very poor measures of the performance of an economy. Still GDP is used to measure the performance in monetary terms, and in ways Simon Kuznets, its creator, warned against. The problem is, as Drucker said, “what gets measured gets managed”, and as Wolf said in his speech, “what isn’t measured doesn’t count”.
Of GNP Robert F Kennedy famously said, “It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials. GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
Of major projects, are they being valued in a good way? From whose perspective? And how accurately are judgments made from each perspective? How should those interest of various parties be weighted? Various mechanisms have been developed to try and answer these questions, but how often are they applied? How well are they applied? When should they be applied? And how often do other criteria, such as political interests, influence decisions?
In his recent presentation, Martin Wolf went on to talk about Economic Value. I think it is fair to say most people would think he was referring to profits, in the case of business at least. But he defined it as, “something that contributes to the economic flourishing of a population”. And he clarified, “By that, I mean quite simply widely shared and sustainable prosperity”, adding, “And if you don’t know what prosperity is, you shouldn’t be in business”.
When I speak as Founder and CEO of the Strategic Management Forum and say, “value creation should be the purpose of every business and organisation”, everyone agrees. They then ask me what I mean by “value”. My standard response to business leaders is that it matters not what I define it as, but that they have their own clear definition. And that they know what value they create, who for and how. I believe this gets to the heart of what management is about, particularly strategic management.
McKinsey & Co, in a global survey of the serving directors of large corporations, found that only 22% believed the boards they sat on had a good understanding of how the firm created value. My own research suggests even this shocking figure is a very optimistic over estimate. And how can a firm or organisation have a strategy that is worth more than the paper it is written on if the directors cannot answer such a fundament question as this?
Do you know how the firm or organisation you lead or work for creates value, for whom and how? Is it measured in terms of profit or prosperity? Is profit regarded as the means of achieving the firm’s purpose, it’s contribution to prosperity, or have the means become the ends? It would not be a surprise if profits are the driver. Neoliberal economists gave credibility to this idea through the Maximising Shareholder Value (MSV) doctrine. It was the mantra of the likes of GE’s Jack Welch, who later admitted it is “probably the dumbest idea in the world”.
These now discredited ideas, which gave rise to the practices that caused the global economic crisis, apply a very narrow definition of value. They also facilitated the idea that competitive markets were the best way to achieve this narrowly defined value (value for money) in places where their use makes no sense: In provision of education and health, and, arguably, in transport and the utilities. The results have been bad or mixed, but rarely good. Isn’t it time to reconsider how we define the value in these sectors, and in relation to major projects?
With the introduction, this month, of the New Corporate Governance Code and the Guidance from the FRC, plus the Wates Principles for larger private businesses, I recently predicted 2019 will be “the year of value creation” and there will finally be a debate about what we mean by value. To give you a sense of the reason I say this let me quote from the FRC’s Guidance on the Strategy Report, “A critical part of understanding an entity’s business model is understanding its sources of value, being the key resources and relationships that support the generation and preservation of value. In identifying its key sources of value, an entity should consider both its tangible and intangible assets and also identify those resources and relationships that have not been reﬂected in the ﬁnancial statements because they do not meet the accounting deﬁnitions of assets or the criteria for recognition as assets. This information may provide insight into how the board manages, sustains and develops these unrecognised assets”.
And as this quote makes clear, we must also consider the limitations of our traditional accounting methods. I cannot go into them in detail in this blog post, but the weaknesses were described in detail in The End of Accounting, by professors Baruch Lev and Feng Gu. And interested readers may wish to watch this interview with Baruch Lev explaining some of them:
A consequence of the weaknesses of traditional accounting is the inability of investors to make well informed decisions, resources are not put to their best use and investment in innovation is heavily directed to Sustaining Innovations, rather than Disruptive Innovation for reasons Harvard Business School’s professor Clayton Christensen, who coined these terms, has made clear. The implication is investments in major projects that make sense are not made. This impacts on levels of economic productivity, and thereby the prosperity of society.
Valueism is a philosophy designed to address these issues. It defines value in broad terms (both financial and non-financial, tangible and intangible) and through the eyes of a wide range of stakeholder. It defines value in the same way as Martin Wolf defines economic value – sustainable, widely shared prosperity – where prosperity is defined in terms of human flourishing. And it sees profits as a means to those ends.
By adopting Valueism as an approach, businesses and organisations can fulfil their Social Contract and contribute to the common good. In doing so they will earn the license to operate that society grants them, and the right to earn profits. And, in recognising and respecting this bargain, trust in business, institutions, and the economic system may eventually be restored. Perhaps, more importantly all organisations will be driven by a strong purpose and “good means” will be used to achieve “good ends”. This is important because, as Aldus Huxley rightly said, “good ends can never be achieved by bad means”.
In the next part of this series of blogs I will talk about Valueism, Value and Innovation.
Paul Barnett is Founder & CEO of the Strategic Management Forum and will be delivering a series of Value Creation Masterclasses during 2019.
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