Resources are an Asset
No ... not so quick ... the matter of ownership is a lot more complicated!
One would think that natural resources would be an asset of the community, but sadly, the rule of law may have preempted what seems like common sense so that the legal reality becomes something very different.
METRICS and MANAGEMENT
Without metrics … NO management
Conventional metrics give wrong signals
You manage what you measure … but you had better measure the right things. Measuring profit
means better profit performance, but not measuring social progress means relatively poor social
progress and not measuring environmental impact means relatively poor environmental
performance. Because measurement is difficult should not mean the issue is unimportant!
Metrics for implementing entities
There are important differences between implementing entities and reporting entities. For a small
simple business organization they can be one and the same thing, but for larger complex
organizations they are most likely to be very different.
The management information needed to implement in the most efficient way is more detailed
and granular than the information that is needed to report the performance of the organization to
outsiders and those merely interested in strategic performance.
Metrics for reporting entities
Metrics should be agnostic
Progress and performance measurement should be implemented whatever the entity. The framing
of the system of measurement should be the same wherever it is used … and it should be used
everywhere.
CONVENTIONAL METRICS
Corporate Performance
Corporate performance is mainly about profit performance and increase in the price of the stock
… and the metrics to measure this profit performance are very very sophisticated both at the
level of the analytical cost and management accounting and all the other supporting management
information and analytics. There is no management information of equal sophistication about the
impact on human / social capital and the impact on the environment / natural capital.
There have been many initiatives in the past few years to encourage more reporting of social
responsibility, sustainability, etc and to encourage responsible investment … initiatives like the
Global Reporting Initiative (GRI), Integrated Reporting (IR), Principles for Responsible
Investing (PRI) and others … but none of these initiatives up to now has addressed the issue of
how to number this reporting in a generally acceptable low cost manner.
The big lesson from corporate performance metrics is that metrics do work and work very well to
improve performance. The challenge is for corporate performance metrics to be broadened so
that ALL the impacts of corporate activity are taken into account, and not just the profit
component and its very good impact investors.
Economic Analysis
Economic analysis has a very different framing from that of corporate performance. The subject
of economic analysis is more complex than corporate performance analysis, and the data far less
reliable. Nevertheless economists have been able to describe the state of the economy quite well
for many years. Economic analysis has been much less successful in describing the behavior …
the cause and effect … that has been driving the changes in state of the economy over time.
Many of the issues associate with economic inequality have been described by economists for
many years … even decades … but there is little agreement about what exactly has caused this
and what to do to make the economy more equitable. Correlation is interesting, but not enough to
get to better decisions.
Worse, a singular focus on GDP growth to solve economic problems begs the question of how
economic growth also grows environmental degradation and profit growth is often associated
with reduced employment and reduced payrolls … and of course there is little consensus about
the impact of changes in tax rates on corporate behavior and economic performance more
broadly.
Investment Analysis
For most of recent history investment analysis has been all about corporate profit and what
corporate profit projections do for stock prices. Stock market prices correlate very reliably with
the net present value (NPV) of future flows of profits.
Initiatives like the UN Principles for Responsible Investing launched in 2007 (now PRI) are
encouraging investment analysis that includes a lot more than just profit. They support the idea
that environmental, sustainability and governance (ESG) are important as well as simple the raw
profit performance.
There is a growing interest in doing better investment analysis that goes beyond simple financial
analysis … but as of now, little agreement on how to do it … and to the extent that better
methods are emerging they are often of a proprietary nature and being used to give competitive
advantage to the owner!
Impact Reporting
There are now thousands of companies that are publishing sustainability reports, up from just a
very few a decade ago. While financial reports can be a very quick read, and show very clearly
the financial state of the company and its profit performance, sustainability reports are usually
very long and many many words, stories and pictures and rather little to show much about the
total impact of the company's activities on human / social capital and on the environmental /
natural capital.
Better impact reporting is desirable and better impact reporting is possible.
BETTER METRICS
Introduction to True Value Impact Accounting (TVIA)
Characteristics of TVIA
Peter Drucker famously said 'You manage what you measure' and there is much evidence that
this is true. It is also therefore essential that all the important things that get measured, and it is
vital that the measures are not 'gamed' in inappropriate ways to gain corrupt advantage.
Transparency, accounting, audit, and accountability
There is a lot of talk about transparency and accountability, but in practice almost the only place
where this is practiced is between the stock market and the reporting of corporate profits. Audit
is mandated in this part of the reporting ecosystem in order to protect investors from company
operators seeking to lie about their company's financial performance, and companies are
expected to do accounting using Generally Accepted Accounting Principles.
Better reporting about social and environmental impact
Relevant transparency, accounting, audit, and accountability are missing when it comes to the
impact company operators are having on society and the environment. This is the essential
purpose of TVIA.
Caveat … wrong metrics are worse than no metrics
Metrics are very powerful, and accordingly it is important that the metrics being used are suited
to the situation. This is one of the reasons that data flows should be fast and feedback about
progress timely. Unintended consequences should be responded to very rapidly and the causality
identified.
Core Concepts
Double entry accounting has been used for hundreds of years, and is used by every (well
managed) organization on the planet. TrueValueMetrics has a similar structure and complements
existing double entry systems to make them much more relevant and useful for management in
the 21st century.
The core concepts are derived from natural science and engineering, and from the essential core
structure of double entry accounting and the classification of accounts into balance sheet
accounts and profit and loss accounts.
Double Entry
The idea of double entry accounting goes back many hundreds of years. It was carefully
described in the late 15th century by Luca Pacioli, but there is much other evidence that it was
being used a long time before that. This system of accounting was very reliable and enabled
merchants to give an account of their transactions to the investors that had funded their ventures,
Classification of Accounts
The key classification of accounts is the differentiation between BALANCE SHEET accounts
and PROFIT AND LOSS accounts. This is the way STATE and FLOWS are accounted for in
conventional double entry accountancy and is the way in which value metrics for everything
should be designed.
In this classification:
- Assets and Liabilities are Balance Sheet accounts
- Cost or expenses and Revenues are Profit and Loss accounts.
The difference between total assets and total liabilities is Net Assets … which is the value of the
business to the owner … sometimes referred to as the Owners' Equity.
The difference between total costs and total revenues is the Profit (or Loss) … profit when the
revenues exceed costs, and loss when costs exceed revenues.
Cost, Price and Value
The general public, and indeed many experts including economists conflate cost, price and value.
They are not one and the same thing. They are very different.
Better decision making requires a lot more clarity about what is cost, what is price and what is
value.
For example, a patient pays a price for some healthcare intervention. The cost may be something
very different, made up of the wages costs of doctors, nurses, technicians, etc. and the cost of
equipment, the cost of space, the cost of medications, the cost of admin, etc etc. The customer
(the patient) only knows the price, which may or may not include a profit (or indeed a loss)
which may be reasonable or not. Value is a completely different thing. If the intervention saves
the patient's life, the value is essentially priceless!
The delta between price and cost is profit.
The delta between value and cost is value add.
The delta between value and price measures how good a buy is for the customer.
Advertising does not bring clarity for the customer, rather confusion and the idea that more
purchasing will improve the customer's quality of life … whether or not this has any reality in
fact!
State and Flow
Initial state … Activities or Flows … Ending State
A core idea in conventional double entry accounting and also in TVIA is that the impact of flows
or activities changes the STATE from what it was initially to what the STATE becomes post
activity.
In conventional money profit accounting the Balance Sheet at the beginning of the period (BOP)
is changed according to the activities reflected in the period Profit and Loss Account to become
the Balance Sheet at the end of the period (EOP)
This concept is very similar to the ideas throughout science and in particular in many of the
industrial processes based on engineering thermodynamics, chemical engineering, etc. The
beginning STATE changes because of some process to become the ending STATE. The value add
is the delta between the two states.
Measuring Performance
Progress and Efficiency
Progress
There is PROGRESS when SOCIAL CAPITAL increases. Over the past two hundred years there
has been progress, but profit progress has been more than social progress and there has been
massive degradation of the natural environment. True progress must be measured by comparing
the STATE of ALL the CAPITALS at the beginning of a period with the state of the capitals are
the end of the period.
There is power in the double entry construct and the classification of accounts that hgas been
used by accountants for hundreds of years. This construct makes it possible to measure profit
without having detailed information about the individual transactions flowing through the profit
and loss account. When the balance sheet at the end of the period (EoP) exceeds the balance
sheet at the beginning of the period (BoP) there is a profit for the period. No other detail
information is needed! This idea may be applied in determining the progress of any reporting
entity, and this same idea may be applied for ALL capitals in the socio-enviro-economic system
as well as simply the capitals associated with a single business.
Thus, the progress of a PLACE is the improvement in the STATE of the PLACE from the BoP to
the EoP … where the STATE of the PLACE is the totality of the Social Capital (Human and
Relational), the Natural Capital and the Created Capitals (Physical, Financial, Knowledge,
Institutional and Cultural).
Note the idea that ALL the CAPITALS must be taken into account. The way in which the
capitals are segmented does not matter when measuring progress.
Efficiency
The modern economy has worked well to generate massive financial wealth for some people but
rather little for most people, and this increase in financial wealth has been achieved at the
expense of nature and dangerous degradation of the environment.
In the aggregate, SOCIAL CAPITAL has increased, but NATURAL CAPITAL has been
seriously degraded. This degradation has been of such a magnitude that many of the systems
associated with natural capital are no longer able to maintain a sustainable equilibrium. The
modern large scale industrial system is extremely inefficient. It requires an excessive amount of
natural capital to enable the growth of social capital.
Because almost all the management focus has been on improving profit performance, the broader
issue of socio-enviro-economic system efficiency has been ignored. That is the impact on society
and the impact on the environment has been ignored as financial performance has improved.
Performance requires more information. Some activities are more efficient at producing progress
than others … in other words some activities use more resources in order get progress than other
activities.
Many … probably most … not for profit performance analysis has a focus on relating resources
used to activities undertaken … essentially the foundation for profit and loss reporting. Whether
or not there has been any progress as a result of these activities is usually ignored.
Units of Account
MORE POWERFUL THAN MONETIZING IMPACT
Conventional financial accounting uses money as its unit of account, and there are established methods for the use of multiple currencies when this is needed because of the nature of the business.
With TVM, multiple UNITS OF ACCOUNT are used in a similar way to account for the way in which different activities impact ALL the CAPITALS that make up the SOCIO-ENVIRO-ECONOMIC SYSTEM. This is more powerful and more flexible than the idea of valuing everything using money and markets
STANDARD VALUE PROFILES
AN OPEN ACCESS DATABASE FOR STANDARD VALUE PROFILES FOR EVERYTHING
STANDARD VALUE PROFILE DATABASE ...CRITICAL DATA ABOUT THE TRUE COSTS AND VALUE OF EVERY PRODUCT ON THE PLANET
Well managed companies know a lot about every product that is flowing into their organizations and being produced for sale. There is nothing like this level of knowedgle about the products that are flowing through society and having impact on people and the environment.
In companies one technique for documenting knowledge about products is the idea of Standard Costs which is powerful and relatively low cost. In the TVIA data architecture, the equivalent are STANDARD VALUE PROFILES.
Using Measurements
Reporting Entities
REPORTING FOR ORGANIZATIONS, PEOPLE, PLACES, PROCESSES, PRODUCTS, STREAMS ... also PROJECTS, PROGRAMS and POLICIES
In conventional accounting there are established rules for reporting for the reporting entity. For example, all corporate business organizations report financial performance including the transactions that relate to the organization but excluding transactions that are outsie the 'reporting envelope'. Rules have been established to handle complex corporate structures involving subsidiaries that are both wholly owned, and those with outside stockholders. In TVIA these ideas are expanded to enable coherent reporting not only for the business organization but for all the various entities that make up the complete socio-enviro-economic system.
External Reporting
External Reporting for Compliance
Some organizations are required by law to report on their operations to outsiders according to a
prescribed methodology. Mostly the outsiders that are being 'protected' by this reporting are the
investors. A requirement to protect the public at large is rudimentary, at best.
Financial performance
Public companies are typically required to report their financial performance according to
generally accepted accounting standards which vary somewhat depending on the jurisdiction.
Social and environmental impact
Increasingly there are moves to required the reporting of social and environmental impact, but
the methodology for this is not well developed.
Performance Improvement / Management
The data required to manage an implementing entity effectively reflects the same 'facts' but the
presentation is very different. The data needs to be presented in a granular way and rapidly so
that decisions can be made to improve performance.
Feedback
In a high performance management system there is rapid measurement are quick feedback so that
the impact of decisions can be observed and further follow up decisions taken.
Cost and Management Accounting
Cost and management accounting is central to most good corporate management systems. Care
needs to be taken so that the data is useful for decision making. Too much data often reduces the
effectiveness of the data.
Standard Cost Accounting
One way to reduce the amount of data while still getting value from the information is to use a
system of standard costs, and variance analysis. This enables thoughtful decisions to be made
about product design and manufacturing processes that do not easily emerge from actual cost
accounting.
Units of Account
How measurements are made is important. In science this matter has been treated with great
rigor, but in the context of business, finance and society the nature of measurement is anything
but rigorous.
Must be better than money
Money is not a good measure because it fluctuates in size. It's size changes in all sorts of
unpredictable ways. Its size fluctuates depending on market conditions, and money quantities
change depending on market conditions … an unresolvable circular condition! Trying to express
the progress and performance of anything simply by using a money metric cannot work
Three principal reporting metrics
Instead of money as the measure, tather there should be measures that are grounded in the reality
of the socio-enviro-economic system. In fact there should be three measures … that is units of
account … one for the social dimension, one for the environmental dimension and one for the
economic dimension.
Existing subsection metrics
These three main dimensions of the system are comprised of many sub-sections. Many of the
sub-sections already have meaningful and rigorous metrics, but the prevailing systems of
reporting, there are no relatively simple ways of consolidating all the metrics into a single
coherent measure for each of the three main dimensions of the system.
Standard Value Profiles
Standard Value Profiles for Everything
Show Life Cycle Impact
The Balance Sheet for a company tells the history of the company up to that point in time.
Projections of the Profit and Loss Account into the future give an estimate of the potential of the
company into the future, which can be presented in the form of a Net Present Value.
The Standard Value Profile (SVP) for a product reflects the history of a product all the way
through its supply chain in much the same what that a company balance sheet accumulates the
story of the company into the current period balance sheet. .
In addition the SVP projects the impact of the product (1) during its use and (2) when it is
discarded and goes into the waste chain in much the same way that the Net Present Value of a
company is computed by reference to the future flows of profit.
Applications of TVIA
TVIA should be used to account not only for the money profit impact transactions, but also for
the impact that there is on society and the environment.
A rapidly growing movement to implement impact reporting has emerged during the past 20
years … initiatives like the GRI, IR, IRIS, and SASB … all of which are useful steps forward,
but generally they promote more reporting of social and environmental impacts without
improving the underlying architecture of the accounting systems.
By integrating the core concepts referred to above into the conventional accounting systems, the
essential metrics to make better decision to achieve a better world may be implemented with
little or no incremental cost.
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