shareholders (3)
Here in New England, a corporate drama is unfolding that illustrates so many of the core ideas that we hold in the ICounting/IC community.
The drama involves a family-owned supermarket chain called Market Basket. There’s a long story of conflict between two sides of the family: one that controls 51% of the company and the other that controls 49%. The long-time CEO Arthur T. Demoulas is from the minority shareholder group and was forced out by the majority group. There are primers on the situation at BostonGlobe.com and News for Shoppers (the photo is from their post).
What happened then? There was a stakeholder revolt that is showing the direct connection between intangible capital and financial results. Here’s the play-by-play using an IC scorecard.
Human Capital – The company had a reputation of taking care of its people and there was a general feeling that this would end with the departure of Arthur T. Many of the employees took a stand and said they wouldn’t work for the company if he was fired. They walked off the job and picketed in front of the stores. They called for suppliers and customers to do the same. The fact that key personnel in the distribution centers walked off the job ensured that the shelves were empty anyway.
Relationship Capital – Market Basket customers have a reputation of being very loyal to the company as well. It manages to have low prices and provides selection (especially of ethnic foods) not to be found elsewhere. With empty shelves and all the bad publicity, the customers are staying away. Volume is next to non-existent in the stores. Customers have taken their business elsewhere. Suppliers are getting hurt too.
Strategic Capital - The culture, the vision and the business model were apparent to all the stakeholders, except maybe the majority shareholders. Their position was a clear message to the market that values and practices were going to change.
The fourth category of IC is Structural Capital. It’s unclear if/how this is affected by the battle. In theory, the systems and the data are intact. That’s because this is the one kind of intangible that is clearly owned and controlled by the company. But, of course, it and the stores themselves are no guarantee of success.
Only Structural Capital is owned by the company. The other three forms of capital are volunteered and co-created by the employees, customers and suppliers. What attracts these stakeholders? Yes, there’s money involved but there is also a sense of shared values, shared knowledge and purpose.
Because companies have a certain amount of control and power in these relationships, many managers and shareholders take them for granted. In interviews, it’s clear that the employees feel that they are fighting against a style of management that would devalue their contribution going forward. In one interview I heard on the radio yesterday, a 40-year veteran of the company said that it was time to stand up to the kind of short-term management encouraged by Wall St.
And that’s where the story stands today. The company has given employees until Monday to return to work. No matter what happens, it’s clear that an enormous amount of financial, tangible and intangible value has been lost. The intangibles are directly connected to the ability of the company to produce revenues and profits going forward.
In and a wonderful editorial by MIT Prof Thomas Kochan at WBUR Cognoscenti, he puts out the call:
It is time to teach the next generation of managers how to lead companies in ways that better balance and integrate the interests of all stakeholders — owners and executives, middle managers who might someday lead the organization, front line employees who are the face of the company to customers, and customers and communities that support the business
Short term profits and long term value are generated through the will of the stakeholders, including employees, customers, suppliers and the community. These relationships are the most significant asset any company owns today. And failure to steward these assets destroys profits and value. That's why smarter companies pay attention to their intangibles.
Would the majority shareholders have made a different decision if their Accountants were also ICountants and were showing them the full capital picture of Market Basket? Hard to say. But I share Dr. Kochan's view. There's a lot to learn here. And it’s time to use measures that matter.
Everything you read about the Twitter IPO is talking about pieces of its intangible capital. Not a big surprise—it’s a perfect example of a social technology company built almost completely of intangibles.
But as someone interested in the field, I get frustrated that the holistic view that IC brings is often lacking. In an effort to gain such a view, I've brought together some pieces of the puzzle:
- Human Capital: Twitter has 2,000 employees. Interestingly, managers/employees own much smaller percentages than seen in comparable young tech companies (could be a good thing—see my comments on shareholders below). There’s no clear leader like Zuckerberg at Facebook or Page and Brin at Google. There’s also no woman in senior leadership (definitely a bad thing).
- Relationship Capital: Twitter has over 100 million Daily Active Users, over 218.3 million Monthly Active Users. The NY Times article explains that the whole business depends on users posting interesting things that attract readers and other users. Other forms of relationship capital includes Advertisers, 3 million websites that integrate Twitter, 6 million Registered Twitter Apps.
- Structural Capital: 6 patents, the platform software itself, 300 billion Tweets and related data about use of the platform
- Strategic Capital: Revenue model is based to date 85% on advertising (65% of which is mobile—better than Facebook) and 15% sale of data. But the model still isn’t profitable. Will it be in the long run? In the S-1, management explains their purpose as follows:
The mission we serve as Twitter, Inc. is to give everyone the power to create and share ideas and information instantly without barriers. Our business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation.
(Sources are listed at the end of this post)
I assembled the above summary using the inside-out kind of data we are used to seeing from and about companies. This approach uses financial and quantitative data to describe the essentials of a company. But there’s no consolidated view, like we used to have with the tangibles-based balance sheet.
Categorizing the data by intangible type and looking at how it’s connected can be interesting. In this case, it shows that not much is understood about the people behind the company’s success. It also shows how dependent the company is on its relationship capital—the primary structural and strategic assets are directly related to the relationship capital. And, you could make the case that the relationship capital is dependent on the continuing strength of the culture (strategic capital) and the people (human capital). But if we don’t know about management, we don’t have a complete picture
How could we get clarity? That’s where I’m left wanting an outside-in measurement. How do the company's stakeholders view it? Maybe the number of active users is a proxy for that. But that’s going to be a lagging indicator. If I had to choose, I would want to monitor the people and the culture as leading indicators. Catching a problem there would be far preferable to waiting to see it in the user data. This is why we recommend that companies proactively measure their key intangibles through stakeholder feedback. Meeting your stakeholder needs is the path to success for just about every company.
And this begs the final question about the IPO. If Twitter puts itself in the position of being beholden to Wall Street to extract more value from its intangible capital, what happens to its power to attract those all important users? In other words, how much alignment will there be between the shareholders and the stakeholders?
This is why I continue to believe that future Twitters and Facebooks will turn to their users rather than the capital markets for liquidity. In the Slate article referenced below, Matthew Iglesias makes the point that IPO’s today aren’t about raising capital, they’re about liquidity for early investors. This IPO replaces an interested, more engaged investor group for a more fickle, demanding investor group on Wall St, not the kind of relationship capital I would choose for a company whose value is so strongly based in intangibles like people, users and partners…
Sources:
NY Times: Twitter’s Biggest Risk is Losing You
Tech Crunch: Twitter IPO by the Numbers
BusinessWeek How to Read Twitter’s IPO Filing
Slate Twitter’s S-1: Four Interesting Points
NY Times Curtain is Rising on a Tech Premiere With (As Usual) a Mostly Male Cast and story about management’s response on Twitter
