Thursday, April 26, 2012

Counting what counts.

Lessons from rugby on appropriate company scoring methods.

If you can’t measure it, you can’t manage it, they say. And so we have created a world driven by measurements. We have become so fascinated with scoreboards that we have may have forgotten that they too are merely an outcome of our behaviour; that it is not the scoreboard that gives us contentment and satisfaction, but the actions and motives that drive it.

I may have used the rugby analogy before, but it deserves repeating in this context and as a continuation of last week’s article on shareholder paramountcy. It’s been said that rugby became a Neanderthal perversion of football, when in 1823 at a place called Rugby; William Webb Ellis gathered the ball in his arms and ran for the goals. Others believe in a more ancient origin dating back to the Middle Ages when teams from neighbouring villages would have great merriment in trying to carry a wine bag over a line protected by the opposing team.

Today, rugby is viewed by its fans as being as tactical and strategic a game as chess is. It has features such as scrums, rucks, mauls, line-outs, first phase through to multi-phases and many others. All, of course, are applied in the overall purpose of carrying the ball over the opponents “try” line and enabling a “conversion”. Today a try is worth 5 points and a conversion 2.

Rugby statisticians, coaches and players spend a great deal of time measuring all the tactical components such as line-outs, rucks, mauls and scrums won, as well as percentage possession and territorial advantage. In addition the scoring method has actually changed over the years. Time was when a try was worth 3 points and not the 5 it is today. The rules of play have also changed over time. The impact of the scoring on the game itself is clear even to the less knowledgeable. Increasing the value of a try has encouraged more “open” and “running” play. If, for example, they were to change the value of a try to 2, and the value of a penalty kick to 5, clearly the entire play of the game will change.

Why change the rules and scoring of any game? Is it for the benefit of the players, the coach, or the administrators? Obviously not. The ultimate customer of any sport is none of these parties; it is the spectator. What makes for good play in any game is what the spectator finds exciting and attractive. A scoring system that doesn’t pander to this need will destroy the sport itself. And surely what we choose to measure and how, should support the real purpose of that activity?

We should always be mindful of the caution, popularly thought to be Albert Einstein’s, that “not everything that counts can be counted, and not everything that can be counted counts.” The point is simply that given our fixation with measurements, the sense of control they give us and their ability to rule and guide our lives we have to be very certain that these measurements support and encourage appropriate behaviour, policies and actions that ultimately serve society’s best interest.

Many do not. Many, from the personal to the national and international such as Gross National product, debt calculations, inflation, exchange rates, Gini-coefficients, indices, and trade statistics seldom tell the full story and should arguably not always be given the sacred status that they are.

If there is one sacred cow that I would like to take to the slaughter house, (perhaps confirming to many that I have finally flipped) it is the company income statement. Company measurements may not be considered important to policy makers at a national or global level. But they are. Even Nobel laureate, Milton Friedman recognised this in his missionary defence of the profit motive in 70‘s and 80’s. It is at a company level where individual behaviour finds expression and gets forged. It is the smallest gear attached to the economic drive shaft that then drives the bigger gears. It is at the heart of our transactional relationships. While we need not succumb to these values at a personal level, it is extremely difficulty to avoid following the herd and kowtowing to profit driven behaviour when most of us are part of that herd.

The last two to three decades have cast serious doubts on the continued appropriateness of the income statement and its supporting pillars of profit maximisation and shareholder value. We cannot discount that it has played some role in creating the challenges of our times: the growth of speculation, financial froth, short-termism, impatience, growing unemployment worldwide and widening inequalities. While it certainly has to be retained as a capital magnet and an important indicator of profitability, it has arguably become counterproductive in dealing with today’s needs of sustainability, long term job creation, competitiveness, customer care, social responsibility, research and innovation, job creation, and industrial and social accord.

If the challenge is to return to substance and tangible value, then tinkering with the income statement through King Reports, Integrated Reporting, Triple Bottom lines and Balanced Scorecards simply will no longer suffice.

If the ultimate purpose of business is to add value to people’s lives, and to create maximum value for all the stakeholders, then that is what should be measured – value added or wealth creation. The fuller value added statement or Contribution Account supports as many, if not more, sound business principles and strategic value as the income statement does. The point is no sound and prudent business principle needs to be lost with a difference scoring method. In a future article, I hope to show how a value added driven strategy will address many of today’s socio-economic problems.

I do not underestimate the quixotic element of my hypothesis. Few things in society today have constructed as many vested interests as profit maximisation and its associate scoring system have. No doubt many will view as outrageous sacrilege this tilting of a wooden lance at such an intimidatingly august windmill as the accounting world.

The income statement served us well since profit was first calculated many centuries ago and in a different era when it was underpinned by some would argue different values. But its day as the most important driver in business may have been done in these times of searching for fresh answers to critical problems.

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