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TVM MANAGEMENT METRICS
for the complex SOCIO-ENVIRO-ECONOMIC SYSTEM
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Numbering the Triple Bottom Line. Accounting for ALL the Capitals
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Social Capital
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Natural Capital
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Economic Capital
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ABOUT THE TVM INITIATIVE
TRANSPARENCY
and
ACCOUNTABILITY
METRICS TO MAKE THE WORLD A BETTER PLACE
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- TVM uses the core concepts of conventional accountancy:
- Enhancing them to include social and environmental impacts;
- While continuing to account for economic efficiency.
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Peter Drucker famously said you manage what you measure ...
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This is undoubtedly true ... in the corporate world, the components that go into making profit are measured intensely in order to improve profit performance ... and it works!
Unfortunately, we don't do anything like the same amount of measuring in order to improve society and avoid degrading the environment ... and we don't have any easy way of talking about social performance and environmental performance in the same way that we are able to talk about corporate performance and investment portfolio performance.
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We argue that you had better measure the right things
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Socio-Enviro-Economic Trends
Decades of Social and Economic Progress & Environmental Degradation
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What has been happening ... What needs to happen in the immediate future
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THE WHOLE SYSTEM
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THE ACTUAL PAST
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A NO CHANGE FUTURE
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A BETTER FUTURE
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More and more DEPLETION and DEGRADATION of NATURAL CAPITAL is UNSUSTAINABLE
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DATA AND FACTS MUST DRIVE DECISIONS
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Data at the Center
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Data Everywhere
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These schematics were drawn around 1995 early in the days of electronic data collection. What was expensive then, has now become relatively low cost. However, the challenge remains to make use of data in a meaningful way so that better decision get made.
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ACCOUNTING'S CENTRAL CORE CONCEPT
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Conventional financial accounting has 'double entry' as its central core concept. The profit and loss of every activity is recorded in the income and expenditure accounts, and the impact of the activity is recorded in the balance sheet accounts. The income and expenditure accounts are used to summarise the profit or loss and the balance sheet accounts show the state of the reporting entity.
The concept of 'double entry' in accounting and accountability is very old, going back at least 400 years when it was described by an Italian Luca de Pacioli. This form of financial accountancy has been an essential enabling factor in the progress of the industrial revolution for the last 200 years, making it possible for engineers and innovators to obtain financing from bankers and wealthy investors.
Since the end of WWII the size of the world's population and the level of industrial activity has grown substantially. The result of this has been substantial depletion and degradation of the natural environment. Conventional financial accountancy does not take this into consideration, and now makes this form of accountancy no longer fit for purpose. In addition, the use of money and price as the central metric for basic transactions means that this form of accountancy does not take into account almost everything that is important for society and quality of life. The purpose of TrueValueMetrics (TVM) is to address these issues.
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TRIPLE BOTTOM LINE
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The idea of a 'Triple Bottom Line' was popularised in the 1990s when it was written about by John Elkington, but was not taken up by big investors and the mainstream of the business world.
The Triple Bottom Line (TBL) is not just about profit performance, but also about impact on society (people) and the natural world (planet). This is sometimes referred to as the 3Ps.
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COST, PRICE and VALUE
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The corporate organization is very familiar with cost and price. Good corporate managers understand the behavior of costs and the behavior of prices, and they manage to optimize the 'delta' of price being bigger than cost. This has been the essence of for-profit business for a very long time.
For customers, there is more interest in the delta between value and price. They understand the behavior of value and price and act accordingly. In a competitive market situation, the customer has leverage, but this has been weakened in the modern economy by corporate organizations consolidating, becoming oligopolies and almost eliminating competitive pressures on prices and profits.
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MULTI-VALUE NUMBERING
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TVM's use of multi-value numbering has similarities with the multi-currency accounting logic within conventional financial accountancy. The socio-enviro-economic system is complex and multiple units of measure (units of account) are needed in order to measure and report progress and performance logically and with reasonable clarity.
TVM does not 'monetize' the elements that make up social and environmental (natural) capital. Money is not a suitable unit of measure because it varies over time and in ways that are not related to what needs to be measured.
In the multi-currency world there are exchange rates between different currencies. The same idea applies in the case of the numbering associated with social capital, the numbering associated with natural capital and the numbering (money) associated with economic capital.
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FINANCIAL ACCOUNTING
IS INCREDIBLY POWERFUL
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FINANCIAL ACCOUNTING IS USED MAINLY IN THE CORPORATE WORLD
TO OPTIMIZE FOR PROFIT PERFORMANCE AND STOCKHOLDER VALUE.
This has created huge economic wealth while ignoring big issues like growing inequality and environmental damage
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TRUEVALUEMETRICS (TVM) ACCOUNTS FOR SOCIAL IMPACT,
ENVIRONMENTAL IMPACT AND ECONOMIC IMPACT.
TVM management metrics provide accountability for all activities and actors so that better decisions can be made to provide the optimum balance between all the competing possibilities.
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THIS IS HOW IT WORKS
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CONVENTIONAL FINANCIAL ACCOUNTING EMBRACES
BALANCE SHEET AND PROFIT AND LOSS ACCOUNTS
BUT EXCLUDES ALL ACCOUNTING FOR EXTERNALITIES
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This graphic shows the basic elements of conventional financial reporting:
- The Beginning of Period (BOP) Balance Sheet
- The debits and the credits for the Profit and Loss Account of the period
- The End of Period (EOP) Balance Sheet
Note that the profit may be determined either by adding up all the profit and loss account transactions or by the totality of the changes between the BOP and EOP balance sheets. There is something wrong when these two calculations produce different answers. This is a useful tool to address corruption and inappropriate financial behavior.
Financial performance ... essentially profit performance ... may look good for the individual for-profit entity, but by ignoring all externalities the impacts on society and the environment do not get taklen into consideration. Taken as a whole the comprehensive results may be catastrophic ... but who cares if it is all about economic profit and only that!
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TRUE VALUE METRICS ENHANCES ACCOUNTING TO
INCLUDE IMPACT ON SOCIETY AND THE ENVIRONMENT
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True Value Impact Accounting enhances financial accountancy to show external impact (externalities) that goes beyond the conventional reporting envelope, to show also:
- Social Impact .. changes to Social Capital
- Economic Externalities ...changes in Economic Capital outside the reporting envelope
- Environmental Impact ... changes in Natural Capital
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ACCOUNTING FOR EXTERNALITIES AND
ALL THE SOCIAL, NATURAL and ECONOMIC CAPITALS
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This graphic combines three of the key components of TVM's enhanced accountancy framework:
- The balance sheet and profit and loss accounts of conventional financial accounting
- The impact the core reporting entity is having on the external capitals
- The STATE of the external capitals
This basic framework applies for the corporate organization where conventional accountancy has been used for a very long time, but the numbers also nest in a manner that has similarities with business consolidations and group accounts.
In the case of TVM, this framework may be applied in a variety of different ways and for every possible perspective including:
- for multiple aspects of the complex for-profit corporation
- the individual process
- the stand-alone facility
- the supply chain
- separate locations
- the complete organization
- for the individual
- for the family
- for the place
- for a community
- for a region
- for a country
- for a product
- for a project or program
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PETER BURGESS ENDNOTE:
Management accountancy and the emergence of electronic data processing (EDP) enabled the optimization of profit performance during my early adult lifetime. It was legitimized and promoted by fashionable universities like the Harvard Business School and the University of Chicago (Milton Friedman). This resulted in financialization of the system at the expense of everything else.
Several decades ago it became aparent that the system needed to be brought back into balance so that social, environmental and economic issues were all managed in a coherent, comprehensive and equitable manner. This was the origin of the TVM initiative. As far back as the 1980s, my consulting work for the World Bank and the UN in connection with international development incorporated many of the essential ideas that are now being formalized within TVM.
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