Destroying company relationships.

By having absurd theories, abstracts and aggregates define them.

If economic theory holds true, you could have a good business selling Johannesburg big Mac hamburgers in New York. For the latest Economist big Mac Index shows that New Yorkers pay about twice as much than Jo’burgers, and that’s a healthy margin by any standards.

Of course, even the most ill-informed will protest that it is much more complex than that. It may not be the best example, but it is some reflection of how often theories, abstracts and aggregates lose touch with underlying complexities, when a macro-assumption not only does not fit a micro situation but its imposition as an absolute can cause more harm than good. The best examples we have are the dominant drivers of economic policy such as Gross Domestic Product and the Consumer price index.

Markets are messy. People are messy. They become even messier when you add to the mix those powerful intangibles and immeasurable such as hopes, fears, expectations and aspirations. These are the real driving forces behind human behaviour and simply cannot be captured by an economic model or economist’s spreadsheet. It has given birth to a recent serious field in economic study called complexity economics, which is questioning many of the assumptions of neo-classical economic theory. The driving forces behind human behaviour are not shaped by these theories, or even the way we try to construct and institutionalise them. They are shaped by relationships at many different levels and in different forms and that are seldom, if ever fully recognised in the way we understand and measure business specifically and economies generally.

Recognising, understanding and shaping the relationship dynamics in companies could hold much promise in solving many of the issues confronting them. I can remember in my early days of financial reporting being troubled by the bland way company figures were presented and the failure to reflect behaviour and relationships that were the real essence behind the figures. In the early 80’s I was exposed to the U.K. accounting format, the Value-added statement, which went quite a way in doing that, but still did not seem to appropriately reflect the relationship between the main role players or stakeholders. But a significant conclusion that could be reached was that the value-added measurement itself not only reflected a figure (income less outside costs), but a magnificent metric of contributory behaviour. To repeat a previous postulate: adding value is the oldest activity known to man. It is also the most powerful business principle.​

·        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

By way of illustration, I’m including the Contribution Account^© that I extrapolated and indexed for the mining industry.

The full strength of this form of accounting is the way it defines relationships – first between the enterprise and its market, where it creates and receives value, and then between labour, capital and state, where that value is shared. It is in that relationship where things can be contaminated and logic lost. I was reminded of this by a comment to my recent article “Debunking monopoly capital” where the reader equated debt with equity to satisfy the conventional abstract of “providers” of capital and, of course, sustain the myth of the supremacy of capital. To be fair, the UK VAS format does this as well, but in the European format interest paid was moved to “outside supplies” in what became known as the Cash value-added statement.

The latter format also moved depreciation and amortisation to outside supplies. Both not only make technical sense, but even more so from a contributory relationship point of view. Allocating depreciation to outside costs is based on the logic that the item being depreciated was invariably purchased from an outsider, but the cost advanced is set-off over time through the balance sheet. Regarding debt, no-one can logically see interest paid as anything but a cost. A lender’s relationship is as a supplier of a service – the use of money, and seldom, if ever extends beyond that. The risk of advancing that money is covered in the interest rate.

Equity also cannot be generalised as a single abstract called capital. It can have many forms such as owner’s money, crowd funding, inherited funds, use of friends’ and acquaintances’ money, majority and minority shareholders, holding companies and institutional investors. All have different relationships with the enterprise. Many will take no heed of esoteric formulas such as capital or labour productivity. When these are imposed as rigid benchmarks they often disturb and sour relationships. There’s also a stark relationship difference between retained income and dividend, with the former being a commitment, and the latter a cash receipt. As a shareholder, you don’t get a debit card to draw on the company’s savings. The relationship between retained earnings and dividends, or dividend cover, speaks volumes about company intent.

I used the Cash value-added statement as the basis for the Contribution Account^©, simply to reflect its behavioural qualities. More recently I have moved personal income tax from labour to state, again as an accurate reflection of the relationship between state and the enterprise. One could argue that the state itself should be viewed as an outside supplier, but apart from its variable share of wealth, the state generally does not (or should not) create wealth in its own right and relies on that created by others for its income.

But here’s the exciting part – nothing prevents or should prevent stakeholders or contributors from defining their relationship with the collective and between themselves. Of course all have a specific context for their existence, but their validity and ultimate strength lie in a common value creating purpose and to be as free as possible from external prescriptions and pressures. Even then, relationships with anything or anyone are still highly manageable and flexible and are defined by expectations which in turn are self-defined. Increasingly companies are starting to see that.

What hinders this process are the absurd theories, abstracts and aggregates that we try impose upon them.

Symphonies of endeavour.

A different view of the context for a stable and sustainable company.

There’s been quite a change in my little space in paradise. What was once largely untouched natural habitat between my home and the creviced Langeberg Mountains, has been replaced with regimented vines and a wine cellar a bit further on. Apart from having a serene space invaded, there was that tug of outrage again at man’s encroachment of nature – the inexorable march of plantation over forest as commerce sweeps it sickle.

One mellows somewhat with the thought that even regimented vines have their beauty. I’m by no means a wine connoisseur and my knowledge of wine did not progress much further than a brief unhappy get together with Lieberstein. But I can appreciate that very few products unlock in such a fine multitude of styles, the mysteries and complexities of nature. But of course it is still man that plays the dominant role: largely responding to the call of commerce and controlling and manipulating inputs and outcomes to achieve maximum returns.

But Olivedale Wine farms is different. Here the enigmatic founder and architect, Carl van Wyk, is allowing indigenous weeds to grow between the rows of different cultivars planted in different selected types of naturally enriched but virgin soil. It’s just one of the many different ways he allows nature to dictate the outcome to produce a symphony of its own. Weather changes or other elements do not concern him, but rather prompt curiosity at what difference it will make to the wine. It’s totally counter-intuitive to conventional winemaking, where markets dictate most of the process; and even differs from organic or “green” wines which adhere mostly only to an avoidance of chemicals in the various stages of wine production.

In this, Carl reflects those creative virtuoso’s in society that are aloof to, yet respectful of market whims and commercial constraints. They seem to operate in a world of their own and follow a code unique to them. It is the one thing that economic theory can neither capture nor explain, yet they represent not only the true spirit of free enterprise but are essential to its success and very often create huge shifts in its destiny. There have been many throughout history, more recently the late Steve Jobs and currently Elon Musk, who has been described as someone “destined to change the course of humanity.” While Carl’s efforts on a much smaller scale can be called symphonies of nature, they create unique symphonies of endeavour.

I view them with some pique. They tend to challenge my perhaps dogmatic view that economies are nothing more than an unwritten contract in which people serve people, and great companies are those that respond to the needs and wants of others. But if the latter thought irritates those who champion the profit motive and self-gain as the true driver of success in business, then the virtuoso’s outright disprove them. Indeed, one could argue that many, if not most of humanity’s ground-breaking achievements have emanated from them. I simply cannot imagine Elon Musk pondering over Harvard’s reverse income statement to justify his promise to take two tourists to the moon next year.  Not understanding true entrepreneurial genius caused former Apple CEO, John Sculley considerable discomfort after firing Steve Jobs. 

That points to a critical element of survival and sustainability for companies in these times of high volatility and uncertainty: the extent to which they can explore and nurture those attributes within their ranks, not always present in one person, but sometimes found in groups and teams. The modern company is beginning to look very different from its predecessors, or, as the Economist once put it: “disrupters are reinventing how the business works”. Organisational theory is not catching up with this trend, and for the most part company systems and structures are not only outdated but tend to strangle those very attributes that will keep them relevant and sustainable.

In a recent essay, Eric Lieu, founder of Citizen University in the US, and Nick Hanauer, venture capitalist wrote: “Markets are a type of ecosystem that is complex, adaptive, and subject to the same evolutionary forces as nature.” This perspective, in the view of a growing body of experts from different disciplines, can be applied to economics as a whole, and challenges most conventional theories and ideologies.

The emergence of “disruptor” and “insurgent” company models reflects this and means that companies are not simply legal entities with structures, prescriptions and procedures, but that they are human eco-systems that constantly evolve as humanity itself evolves. It’s both an intriguing and inspiring thought because it allows a refreshing relationship between companies and their external environment: being shaped by it, but also contributing to it. It also gives a new and refreshing context for company analyses and investment advisors – the kind that can tap seriously into Beta potential. 

Companies today have to cope and interact with an unprecedented multitude of complexities and variables, and stability can no longer be found simply in structures, systems, procedures and planning. Their survival and sustainability lies in the paradox of finding stability through flexibility.