Date: 2024-12-21 Page is: DBtxt003.php txt00016279
Peter Burgess Messages
About Better Metrics
From Peter Burgess ... some long and meandering thoughts on enabling better metrics about the socio-enviro-economic system!
Peter Burgess
On Fri, Aug 24, 2018 at 9:19 AM Jonathan Greenman
Hello Peter - my name is Jonathan Greenman, and I have been working with Michael and the CMA interns on some ideas for the risk data dashboard. My view is that some metrics can be created to shed more light on risk-adjusted returns, liquidity, and capital. The focus until this point has been on banks, though it may be possible to extend these concepts to non-financial firms. I can imagine clients of these metrics being research analysts, investors, asset managers, and bank strategy functions. I think intrinsic analysis of the balance sheets can sometimes provide a different view of risk and returns versus relying completely on existing market valuations.
Michael said that you might have some interest in speaking further. My apologies I was supposed to attend a meeting a couple of weeks ago that you were participating in, and the logistics did not align for me at that time. I understand that you had some comments regarding corporate social responsibility and externalities for consideration also. If you have time next week or in September, I am happy to brainstorm further. I’d suggest initially having a conversation with the 3 of us, and then we can involve others as the vision becomes clearer.
Best regards,
Jonathan
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Thank you ... some long and meandering thoughts on enabling better metrics about the socio-enviro-economic system!
Peter Burgess
Mon, Sep 3, 2018, 12:50 PM
to Michael, jonathan.greenman
Thank you for last Thursday . I really appreciate your help in figuring out some sort of 'PRODUCT' to sit on top of the multitude of issues that add up to the modern socio-enviro-economic system we all occupy.
These notes go on for ever ... for that I apologize. They do say that it takes far longer to write something short than something long, and this proves the point! The PRODUCT we are looking for is somewhere in all of this ... but I am not yet sure exactly where that might be!
While this was probably not apparent, I am probably a whole lot closer to understanding what this product might be than I am able to articulate clearly. Certainly the mainstream of economic organizations are talking a lot more about issues like CSR and environmental sustainability now than they were 10 years or even 5 years ago. At the same time there is no question that the single most powerful driver of economic decisions are still to do with profit performance and especially the growth of profit. We need ways to number social impact and environmental issues ... and at this stage I do not want this to be using monetization.
Basically all my life I have been interested in how things work ... going back to making a 1913 motorcycle work when I was about 14 years old! Later I got a formal education in engineering, economics and then later in accountancy. My economics was influenced by trips to Canada and the USA in 1960 and 1961 when I was exposed to the vast difference between the wealth of the USA and the post-war austerity in the UK and Europe. I became an economic migrant in 1967 and a very young CFO who was quite successful because I believed that profits were earned in the factory and not be engineering the financial books!
So far so good ... but my conversion from employee to independent consultant was not so good. I never got the message that you give the client what they want, rather than what they really need! So my client base was never very strong ... but I did do quite a lot of work internationally doing work for the World Bank, the UN, and a variety of others who were in some way connected with my friends and my past! In the end this work has taken me to over 50 countries, and given me the opportunity to see death and disaster first hand.
Going back to the 1970s I saw massive corporate misbehavior and oil pollution that was obscene. Later I did a consulting assignments for IFAD in the same area in support of artisanal fisheries.
The project was far too small to make much of a difference in a world dominated by corruption and the powerful international oil companies! Too many oganizations, especially big and powerful organizations, do not care how they behave if it is out of sight and they will not be held to account.
When we do 'development' right, there can be amazing progress and very fast ... but this happens far too little. I have seen it in several unlikely places (Burundi, Sierra Leone, Horn of Africa) but it is rarely sustained because bigger bad national and global trends overwhelm the local wins.
Over the years I have been exposed to evil in its many forms ... at the same time I am impressed by the number of good nice people than inhabit the planet ... almost all of whom have little to say that can make their life significantly better.
Back in the late 80s early 90s I worked a lot with the UN's Development Cooperation Report and eventually created something I called BDSDA (Burgess Database System for Development Analysis) or DBSDA (DataBase System for Development Analysis) to help me understand as much as possible about a (small) national economy or sector. I used this to help with the work I did with the First Development Plan for Namibia after its independence in 1991 which was used to raise some $700 million of development investment for a country of just 1.3 million people ... perhaps the most successful pledging conferences in UN history.
Soon after this, the UN mounted a similar planning exercise in Afghanistan of which I was a part. I did pretty much the same work ... but in this case the international community committed ZERO with the world arguing for a post cold war 'peace dividend'. The team leader Winston Prattley was arguably one of the UN's most respected elder statesmen of the time but we failed totally. Looking back ... I am motivated very much by the amount of very powerful stupidity that I have seen driving very important and consequential decisions
I am very positive about the power of accountancy and numbers to manage. This is what I did early in my corporate career, and to a lesser degree in my development work and involvement with humanitarian relief. Profits have performed well ... they have grown exceedingly well ... and the numbering system to support this is very very sophisticated.
We do numbering about economic growth using GDP ... a really pathetic measure ... but one that has strong correlation with profit performance.
And we also do numbering about stock prices and the market value of corporate entities.
The numbering about social performance is for all practical purposes not in play.
And the same goes for the numbering about environmental issues. Worse, environmental issues they have been subject to massive misinformation in large part because they have a huge potential to do damage to the all important profit performance.
Another issue is that hardly anyone seems to have much understanding of how money works ... and eventually most conversations end with the premise that the value of money is simply about trust!
Based on all of this, I am working to architect a numbering system that uses the core concepts of conventional accountancy to handle not only the transactions that impact economic and financial capital but ALL the capitals ... economic capital, social capital and natural capital. This numbering system embraces the idea that there is value add when the amount of capital increases over time, and value destruction when it goes down. In the modern world profits have increased economic / financial capital but a the same time natural capital has been depleted and degraded and hows gone down. Social capital has increased some part of the population, but has declined for others in the population Changes for ALL the capitals must be brought into account. Simply put, progress is achieved when the total of all the capitals increases over time, and for most of my adult life, we have increased financial capital at a record pace, but at the same time we have reduced natural capital also at a record pace, and net net the improvement in social capital has been rather modest compared to what might have been achieved.
I am trying to bring into all of this some of what I have learned about management and especially the role that data can play in getting good results.
For reporting purposes, data are summarized and reported 'up and out'. This is an important thing to do, but it simply reflects what has been achieved operationally. It does little to 'move the needle' ... it simply reports whether or not the needle got moved!
To improve performance, the data are organized to be relevant to a specific activity so that the activity may be optimized. Corporate organizations have been very good at this to improve impact on profit, but it is more of a challenge to improve performance not only for the discreet independent activity but for ALL the activities through the supply chain, during this step in the life cycle, and then through use and into the post use waste chain. I refer to all of this as STREAMS, STRANDS, STRINGS. I want accountants to move from being 'bean counters' to knowing how to add up 'spaghetti'!
I talk all the time about better accounting that does the accounting for ALL the CAPITALS ... SOCIAL CAPITAL / NATURAL CAPITAL / ECONOMIC CAPITAL where:
- ... SOCIAL CAPITAL comprises Human Caoital and Relationship Capital;
- ... NATURAL CAPITAL comprises Land, Water, Air, Ecosystem Services, Biodiversity (Fauna and Flora), Climate Systems;
- ... ECONOMIC CAPITAL comprises Financial Capital, Physical Capital and Intangible Capitals (like Knowledge, Institutional, Cultural and Locational Capital)
I also talk a lot about the ACTORS that make decisions and do the work to drive these ACTIVITIES.
I am very much aware that our modern economy that in many ways is very successful (especially in terms of profit performance) has been achieving this success without paying much attention to issues like growing inequality and enviromental unsustainability.
I see PRODUCT is one of the ways that the system (socio-enviro-economic) is held together. To a great extent, it is product that enables quality of life for people, and that is very important. Once upon a time there was a serious shortage of product, but in last century the production of product has been revolutionized, and we no longer live in a world of shortage, but more in a world of abundance and surplus.
PRODUCT is also what business organizations produce to sell and generate profit. More sales gives more profit whether or not the consumer really needs to have the product. Product design to create obsolescence and early junking is standard practice ... and advertising is always about buying more no matter what.
And PRODUCT also has a supply chain ... which has been used to distance a BRAND from the actual manner in which the products are being produced, whether it is workplace conditions, or any number of environmental issues.
I see a PRODUCT being linked to what I call a STANDARD VALUE PROFILE. This is something like a standard cost in a corporate system, but addresses much more than just the production costs, but all the impacts through the life cycle of the product, both good and bad. Food that makes one healthy is not numbered in the same way as one that contributes to diabetes.
Within the various FLOWS (that is STREAMS. STRANDS, STRINGS) there are various important material elements. A good way to keep the emerging framework relatively simple and effective is to focus on what is material.
PAYROLL is material. PAYROLL is a bit like PRODUCT. It connects two critical parts of the socio-enviro-economic system ... it is a cost for the business organization and a charge against to financial capital while at the same time it is a benefit for the worker / employee and an addition to social / human capital. The profit of the organization is increased when payroll is reduced, not matter how this reduction is accomplished. During the past 50 years, companies have outsourced high wage payrolls to places where wages are lower and working conditions well below what should be considered acceptable ... but this has not been accounted for in prevailing financial; reporting. This needs to change.
ENERGY is material. ENERGY has been the driver of the industrial revolution and the many benefits to society that have been accomplished, but ENERGY is also a driver of many detrimental environmental issues. Both the positive aspects of energy and its negative aspects need to be taken into account together. Industrial processes that use energy more efficiently may improve their profit performance while at the same time improving their environmental performance. Business organizations should also be held to account for the supply chain associated with their energy supplies and rewarded accordingly. The same goes for retail consumers.
FOOD is material. FOOD is a PRODUCT segment and very important with many different production steps and supply chains. In addition FOOD has very very important impacts on health and wellness. The idea that market price is the single dominant metric used to drive the food sector makes no sense, and this should be changed. With the modern technology that is available it should be possible to create a system of incentives so that consumers are encouraged to consume more healthy foods and ones that have the least negative environmental impact.
PLACE is important. Living ones life in the United States of America is very different from living in, for example, Syria or Yemen ... but human beings in the different places have a lot more in common than differences. The role of PLACE in quality of life should be 'numbered' in a meaningful way. The performance of a PLACE should be numbered in a way that reflects the STATE of the PEOPLE in the PLACE as much or more than the FINANCIAL STATE of the GOVERNMENT of the PLACE. This idea should also apply to the STATE of a COUNTRY ... and back in 1990 the UNDP started publishing an annual Human Development Index to capture some of this more clearly than was being done on the World Bank's World Development Report which was much more about conventional economics and finance.
I also argue that accountability should be applied everywhere. Self reporting by organizations is now the norm, but we can do better. There can be a view from the outside of the business organization, especially as it relates to the impact of some of the elements mentioned above. To the extent that a company will not tell you what the numbers are, it is often possible to connect dots in order to fill in the gaps. Arguably technology enables the framing of everything in our global socio-enviro-economic system with a network or data ... and if we do it right, this networked of data may be used so that everyone is in a position to make way better decisions in the future than people have been able to do in the past. Arguably, most of the information that flows around the planet today is driven either by advertising (to increase profit performance) or news curated for some form of political benefit. Very little of the data are designed to help people make better decisions for themselves.
It is quite a challenge to design, develop and deploy something like a 'dashboard' to embrace all of this and be a potentially viable business product. I think the answer to this dilemma is to have a family of dashboards that address small parts of the whole ... linked in some way to some sort of data store to accumulate information that is valuable or perhaps essential to making sense of the various elements of the system.
I would observe that there is already an amazing amount of data ... but rather little of this is available to be used for decision making by ordinary people in an easy and understandable way.
Resepctfully
PeterB
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Jonathan Greenman
Tue, Sep 4, 2018, 6:28 AM
to me, Michael
Hello Peter,
Thank you for meeting last week, and this very thoughtful note! I wished to send you a quick response to acknowledge receiving this, and intend to reply with some more detail once I have the capacity.
I’m preparing for travel to the Middle East and Africa to lead some trainings on bank risk management and capital regulation. I’m expecting to be abroad most of this month. Hopefully we will meet again in October when things settle to advance the research and metrics project that we were speaking about.
Best regards,
Jonathan
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Jonathan Greenman
Sep 20, 2018, 1:21 PM
to me, Michael
Hello Peter,
I reviewed your note. There are funds and ETFs that focus on socially responsible investing. Some examples are Morgan Stanley and Fidelity when I did a quick search. I agree with the importance of focus on social and environmental issues in the political sphere. If your goal is to quantify the impact on social and environmental sustainability of different company practices, and reflect it in financials, I think it gets too complex to adjust the market and accounting metrics for such effects. For portfolio selection criteria, I think it is food for thought.
Ultimately I think it comes down to investor culture. Some investor want to maximize returns regardless of the impact on society and the environment. Others wish to be more responsible and might be willing to trade off some points of return for socially responsible ends. Then it is a matter of the policy and regulatory realm to require companies to be socially responsible, or create proper incentives. For the standard metrics of profitability, equity and liquidity I think we have to keep that linked to accounting and economics.
Jon