Friday, October 28, 2016

The goose and the turkey

A big bird view of an economy and government budgets.

Each time the fiscus engages in a major exercise like a medium term budget, or the annual budget itself, I am prompted to mix some metaphors involving turkeys and geese. They present a perfect picture of how the government, perhaps all of us, view the economy.

Years ago, if you were called a turkey, it could mean anything from being as dumb as they come, to being rather silly. But that’s probably a generational thing, one that would raise the ire of a large number of people whose ancestors created the Ottoman Empire. Today, the overwhelming image of the turkey is one of a rather noisy, ungainly, ugly creature whose sole purpose to humanity is to be fattened for slaughter and fill the plates of a festive table. “Goose” will be remembered by the boykies from Brakpan as a possessive term for female partners. Geese also may have similarly assigned attributes to turkeys, but are not as popular for the pot, have sought after plumage, and of course, are known, according to Aesop’s fables, to occasionally lay golden eggs.

Those rather clumsily concocted images – one of a creature fattened for slaughter, and the other for protection, preservation and nurturing the longevity of golden egg laying, are a fitting analogy for an approach to an economy. By their very nature, governments tend to view all activities in the economy as turkeys, sometimes slaughtering an entire rafter for a massive binge for a few years, at other times struggling to keep them protected from predators from both inside and outside their enclosure. South African Finance Minister, Pravin Gordhan somehow reminds me of a solitary pen protector. But I’m still not sure whether he sees them as turkeys or geese. At the very least, when his income tax coffers are mostly filled by only 10% of the population, from which the rest must feed, he must be painfully aware that he is starting to cull his breeding stock.

But who can blame governments? Is it not a general view we all have of economies and transaction itself -- that they are there for plundering and for maximum self-gain in the shortest time possible? That all people and things – from a close relative to a wild flower in Namaqualand, are there for exploitation and extraction? In behaving that way, we should not be surprised if we feel that way: extracted and exploited – from the double digit increases in medical aid tariffs, toilet roll prices and shoddy service.

To temper that, and to try and ensure some balance in the forces that we ourselves  unleash through this twisted understanding of what makes us human, we create governments without having much assurance, apart from a very imperfect franchise system and some watchdog institutions, that they will not become even more predatory than private initiative and free transaction.

That leads to the choice that has occupied great minds for centuries, as well as conflict ridden streets, legislative benches, political party think-tanks and even war trenches. It is a question I sometimes ask my fundamentalist socialists: “who do you trust more to do the right thing? Governments or business?”

I don’t really need a response. Globally, private enterprise by and large is trusted more than government. In this country the gap is 16% trust in government and 60% trust in business. (See article here). It brings to mind a bit of banter I had with a former Finance Minister, in which I argued that in a utopian economy, he would not have a job.

Of course, that is purist mischief. The real world is overwhelmed by so many blemishes, pressures, fault lines, misbehaviours and imbalances, that it renders useless sound, intuitive and experiential knowledge. One of the unfortunate side-effects of this seemingly endless power juggling between state and business, is that gestures like the business leadership support for Gordhan ahead of the mini-budget, is that it is muted, if not ironic for the largest part of voting population – where business by and large is still seen as the “enemy” in the populist rhetoric of the day.

Which brings me to part 2 of my untold story – a story that in itself should go a long way to restoring business credibility and certainly relieve the facile call by so many to take, take, take from the capitalist cow. The first part reminded readers of the benevolent underpinning of private enterprise in providing society with the goods and services that they need, and under long established, ancient rules of legitimate transaction. Therein they add tangible and measureable value which translates into wealth creation. The fact that this process has mostly misguidedly, perhaps even falsely, been defended under a “profit” or self-gain motive, has done irreparable harm to that noble status. It supports a simple resentful refrain that if you are about taking, then I have a right to take from you! And I’ll do it through my big Boet come budget time.

But the indisputable fact demonstrated by centuries of experimentation, is that private enterprise is far better and more efficient in creating wealth than governments are. What is more hotly disputed is whether they are equally efficient at wealth distribution. Perhaps not as equitably as many would like, but still pretty well within the fundamental logic that the primary aim of sensible distribution is to support wealth creation itself. In that it has to meet the legitimate expectations of ALL of the stakeholders, especially the direct contributors of labour, capital and state; and ensure their continued contribution.

This becomes crystal clear when company figures are presented as a Contribution Account, and in my consulting days, in presenting these figures in company workshops, I was always amazed at the attitudinal shift it could effect. These workshops have now been converted into off-the-shelf transferable products that can be viewed here. In the dire need for stakeholder cohesion, and a broader understanding of this precious construct we have, it is unforgiveable to maintain such a narrow view of business that attracts an unbearable burden, whether in enmity, perceptions, tax or regulations. The tragedy is that business mostly has itself to blame.

The essence of part two of the untold story is that in the contribution account itself, demonstrated by years of working with it, and at many sites, labour and state (or government) together derive far greater benefit than capital or shareholders. Unpacking the detail each of these categories portrays a splendid narrative of enablement and empowerment.  Perhaps the fiscus should add this format, extrapolated into national accounts, into their research.

Along with many South Africans, I fear that the geese may have wedged their way to more promising pastures. They can fly you see. Turkeys not so well.

Will those that remain also take flight, with global credit ratings leading the wedge? 

Sunday, October 16, 2016

Clash of generations.

Can business be a greater bridge between hopelessness and promise?

“Every generation blames the one before.”

This opening line of that haunting hit song: “The living years”, by Mike and the Mechanics, and the full lyrics (see here) have a reflective message for all generations, both at an individual and collective level. They assume even deeper meaning, if you add another observation: that every generation hopes to leave the world a better place.

These two pronouncements reflect an ongoing struggle that often leaves the outgoing generation bewildered and deeply saddened, and the new agitated and belligerent.

It is the perpetual struggle of the living years. Rarely do the two mind-sets meet and then only when they face a combined threat to their existence and freedom such as a war or oppression: a reflection of my father’s and my youth respectively. In the absence of these or a state of uncommon national contentment, the young wage war on the old, mostly at a personal level, but often at a societal level. And those of the ageing who have entered the last of their living years, but can remember well their own troubled selves reborn in today’s student stone throwers, try to have their faltering voices heard above the sirens and shouts; when, as the song says: “all of their frustrations, come beating at your door.”

“You don’t know!” we say. “No-one possesses the ultimate truth. No noble end can justify malevolent militancy. Be patient. Your cause is being driven by a third force. You are not being heard because you cannot speak with one coherent voice. You create power vacuums that are filled by two-day hot head wonders intent on spectacle more than compromise. Above all, as much as we all fail to recognize it in a hormone active state, the struggle is as much with the self as it is with others.”

At the same time, we of the outgoing generation have to recognise that we are leaving a world of intolerable imbalances and fault lines. For too large a number, it is a world of little hope, of uncertainty, robbed of aspirational promise, of grudge inducing inequalities and of insecurity. It is fertile ground for dissension, frustration and anger and it fuels extremism and fanatical activism. It will force evolution into revolution. In that, the cause is often not the real issue and can morph from one to another. Being part of an angry mob, whether 25% or less of the whole, is cause enough for a good number and gives a critical mass to create social trauma.

The turmoil for many of the outgoing generation is multiplied by their own internal struggle, by posing at a personal level the same question: whether they are going to leave the world a better place in their sphere of influence. It’s a haunting self-prosecution in confronting mortality; one that imposes a burden of unfinished business; of repairing broken relationships; creating some modest legacy beyond material things for which much has been sacrificed but then abandoned to an estate in the forlorn hope of making up for past neglect, or receiving recognition and gratitude when one is past caring. I have witnessed that many times – in some even to the point of not being able to accept that their time has come and plunging their final living years, months, days and hours into misery.

In sharing my own, I am fully aware that I might be inappropriately narrow and testing the limits of your forbearance in what could be seen as self-indulgence. But at one or other point popular assumptions and the discourse in organisational practice have to change to become a valid and significant contributor to easing tensions.

I have always had a leaning towards interrogating context rather than content. It made me acutely aware of how the critical role of business as provider not only of goods and services, but of purpose and meaning, had been degraded and smeared by atrocious business behaviour, populist rhetoric, perceptions and assumptions. But most of all, by an obsession with reward and extraction rather than contribution. It has largely neutered business as a credible bridge between hopelessness and promise – a bridge that could remove some of the wind from the sails of dissent. I have unshakeable faith that business can reclaim that position and all I have written, done and am still doing has had that as its aim.

That path led to the formulation of an authoritatively endorsed argument, including testimony by retired retailer, Raymond Ackerman, that it is “the way of the future; the whisper of tomorrow”.  (See endorsements here.) The premise is simply that the fundamental underpinning of sustainable business is service, benevolence, empathy and making a difference to others. Acute awareness of the powerful interplay between behaviour and accounting, as well as the need to preserve sound business principles, prompted a questioning of the narrow nature of the final business accounts, the struggle for alternatives and the neglect of a long established format of value-added accounting, or contribution accounting.

It is not complex or even new. It is perhaps more appropriately called “accounting for contribution”. It is about being and doing, not just counting. Above all, it binds behaviour and measurements in a cohesive, harmonious and virtuous circle for sustainable growth. All of this has been captured in books, articles, workshops, interviews and speeches. But what has been missing is conversion of theory into broader application: the creation and widening of a comprehensive methodology embracing already proven application in areas such as employee awareness, involvement, communication, financial transparency, and service orientation; to overall strategy, reward systems and entrepreneurial pursuit.

This has been developed in the past few months into what I have called the Contribution Accounting Methodology, or CAM (see here). Above all, to ensure broader traction, the content had to be made highly transferable and break from the standard mould of high cost exclusivity. That has been my unfinished business. It comes at a time when globally there has been much soul searching about the conventional role of business in society.

While no-one, least of all myself, possesses the ultimate truth, evolution is as much about sharing ideas as it is about experimenting with the new.

Sunday, October 2, 2016

The untold story

Why company reporting fails to counter the assault on free enterprise.

We all have memories that make us cringe in embarrassment. One of mine is when I had to cut short a talk to a group of about 50 accountants of a large paper company, and in my opening, put the simple question to them: “what contribution do you think your company is making?”

I was expecting them to respond with: “producing paper”, or even a visionary “enabling people to record events and share ideas”. That would have been my cue to introduce value-added as the only measurement of that contribution. Instead I was submerged in EVA’s, HEPS’s, NOI’s, NOPAT’s, ROTA’s and RONA’s, and a plethora of other shareholder “goggas”.

It made me acutely aware of how narrow our understanding had become of this magnificent social construct we call free enterprise. So much so that it has led to an imbalanced obsession with immediate self-gain and material rewards. And then exclusively for one interest. For the most part that has been created first by our inordinate focus on reward or outcomes; second by the fixation with measurements, and third by the exclusive target of those measurements. 

What really gave this blinkered view weight is Milton’s Friedman’s argument some years ago that the sole purpose of business was to maximise profit; against another argument decades earlier, by industrialist Bill Kellogg, that the purpose of business was to add value to people’s lives and as a consequence one makes handsome profits. Friedman’s understanding creates pressure on business to contribute directly to state spending such as free tertiary education, against the perhaps disingenuous view that these costs, including corporate tax, are simply passed on to others such as customers and employment.

In what can only be called abysmal PR, we have distorted the better narrative: that of the contribution that has been made. Here tribute has to be paid to Mervyn King’s efforts at establishing the integrated report, which some may view as prescriptive and draconian, but most of which simply reflects what all companies do anyway – not only for shareholders, but for society at large. Unfortunately, the integrated report itself is still the Cinderella of company reporting, still has a primarily shareholder focus, is not widely read, and often submerged in too much detail, conveyed in reams of glossy pages that could rival Tolstoy’s War and Peace. 

What is missing is an inclusive stakeholder account that captures the essence of the contribution that each economic cell makes – an account that summarises the detail of the integrated report itself. This could be the Contribution account, which in turn is a small adaptation of the value-added statement. When one views the term “Contribution Accounting” as an active process or organisational methodology, it assumes a completely new and exciting dimension. (See full dimension here).

I am aware that to most readers I am being somewhat repetitive. But this omission from statutory accounting keeps gaining significance against the increasing political onslaught against free enterprise; the expedient non-recognition of what enterprise really means to us all, the harm narrow reporting has done and continues to do; and the dire need to change the conversation. (See Moneyweb article here).

It is true that there are enough systemic blemishes and misbehaviours by many to fortify its detractors. The monetary mess we are in, financial fault lines, and corporate megalomania have all added to a new ideological warfare. But for the largest part by far, the narrative at an individual non-corporate level is still a good one.

As a final account, the Contribution Account is broad and stakeholder inclusive. It could be called the “integrated account” in the spirit of the integrated report, but the term has already been deployed in bookkeeping systems. What certainly deserves repeating is the need for a reassessment of the power of the value-added measurement itself and challenging its inexplicable neglect in organisational strategy. I have previously labelled it as the majestic metric because: ​
·        It is behind all positive transformation
·        It is the source of wealth
·        It measures contribution
·        It measures reward
·        It links contribution and reward
·        It drives all contributory behaviour
·        It is the base of GDP, the nation's wealth
·        It is the source of profits, wages and taxes
·        It affects all company measurements.

The practical power of the measurement at company level lies first in its calculation of income less outside supplies, and then how to improve it through selling more, getting a better price and keeping outside costs to a minimum. It guides an enterprise into becoming truly market driven which in turn encourages growth rather than containment, employment and increased prosperity.

But then it also tells its own story of the difference the enterprise makes to others, the extent to which it enables those in the supply chain and the multiplier effects that far exceed the value that the enterprise itself has added. These three lines alone: Income, outside supplies and wealth creation, are at the heart of creating value for all. They can be practically demonstrated by all companies and ventures, large and small; cutting through generalised theories, abstracts and averages, debated with detractors and adolescent assumptions about what business should be doing as a social entity.

And if we want to focus on wealth distribution, then let’s at least get that into true perspective. The wealth distribution numbers in the Contribution Account reflect the contribution all three estates of labour, capital and state have made, and the benefits they have received. In most cases, labour and state (or government) together derive far greater benefit than capital or shareholders. Unpacking the detail each of these categories portrays a splendid narrative of enablement and empowerment. If we want to set so much store by metrics, then failing to tell the story behind them is tragic.

It is the better story to tell and it is simply not being told enough.