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#7
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EFFECTIVE MANAGEMENT
MOVING THE NEEDLE ON IMPORTANT ISSUES
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YOU MANAGE WHAT YOU MEASURE
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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.
This has to change
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We argue that you had better measure the right things
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TPB note: Management accountancy and electronic data processing (EDP) enabled the optimization of profit performance during my adult lifetime and legitimized by fashionable universities like Harvard (the Business School) and Chicago (Milton Friedman). This resulted in financialization of the system. The system needs to be brought back in balance with social, environmental and economic issues all managed in a complex optimized manner.
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ABOUT THE TVM INITIATIVE
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Numbering the Triple Bottom Line
Accounting for ALL the Capitals
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TRANSPARENCY
and
ACCOUNTABILITY
METRICS TO MAKE THE WORLD A BETTER PLACE
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- TVM uses the core concepts of conventional accountancy.
- Enhances the concepts to address the issue of social impact.
- Also incorporates impacts on the environmental.
- While continuing to manage for economic efficiency.
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IMPORTANT IDEAS IN ACCOUNTANCY
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Progress is Balance Sheet (B/S) Improvement over Time.
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NO CHANGE IN BALANCE SHEET
STEADY STATE
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GROWTH IN THE BALANCE SHEET
POSITIVE PROGRESS / VALUEADD
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DIMINUTION OF THE BALANCE SHEET
VALUE DESTRUCTION
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Measure Balance Sheet Change and You Measure Progress.
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This set of graphics demonstrate that change in state over time describes progress. In this simplified series three different scenarios are depicted: Steady State; Good Progress and Backsliding.
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Complexity of daily activities ... impossible to manage ... profitable activities but degraded state!
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Focus on state enables measurement of progress ... much more effective for meaningful management.
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Impact on ALL the Capitals: Social, Natural and Economic ... the essential TVM framing!
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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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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
which has created huge economic wealth but also enabling inequality and environmental damage
TRUEVALUEMETRICS (TVM) OPTIMIZES FOR SOCIAL IMPACT, ENVIRONMENTAL IMPACT AND ECONOMIC IMPACT AND ALSO ENABLES RADICAL ACCOUNTABILITY FOR ALL ACTIVITIES AND ACTORS
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TRUEVALUEMETRICS (TVM)
IS BETTER FOR THE WORLD
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THIS IS HOW IT WORKS
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CONVENTIONAL FINANCIAL ACCOUNTING EMBRACES
BALANCE SHEET & PROFIT AND LOSS ACCOUNT
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This graphic shows the basic elements of conventional financial reporting:
- The elements of the Beginning of Period (BOP) Balance Sheet
- The debits and the credits for the Profit and Loss Account of the period
- The elements of the End of Period (EOP) Balance Sheet
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TPB note: 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. When this is done for an individual for-profit entity, the results may look OK, but when the idea is applied to all the capitals, then the results are 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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MULTI-VALUE NUMBERING
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TVM's use of multii-value numbering is similar to multi-currency accounting which is another concept from conventional 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 with reasonable clarity.
TVM wants to avoid 'monetization' of elements that make up social and natural capital. Money is not a good unit of measure because it varies significantly over time. Real measures are constant.
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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COSTING, PRICING and VALUING |
The corporate organization is very familiar with costs and prices. 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.
The customers, there is more interest in the delta between value and price. They also understand the behavior of value and price and act accordingly.
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