Leif Edvinsson sent me a link to this article last week entitled The Long View: Why “Maximizing Shareholder Value” Is On Its Way Out by Rick Warzman, the Executive Director of the Drucker Institute at Claremont Graduate University. I support this movement and think we in the IC movement are working in the same direction.
I was a young banker in the 1980’s when the dogma of “shareholder value” as it is currently conceived started to take hold. I remember what an attractive idea it was. It’s a deceptive term because it sounds like a noble cause, building value for those invested in a company. In practice, it has lead to dangerous distortions in corporate thinking and justified all kinds of bad behavior. You see, the thesis that it is the job of a corporation and its management is to maximize the fruits going to the shareholders ignores what makes a company successful--engaged employees who are motivated to do their best work and focus on solving problems for customers and other stakeholders of their organizations.
And the application of the concept has been measured by tracking short-term movements in the stock price of the company. Traders on Wall St. tend to have a short-term perspective and drive this short-term thinking. (By the way, the widespread use of stock incentives for management teams, which sounds like it would promote long-term thinking actually serves as an incentive for the managers to adopt the trader mentality)
There are a couple ways that intangible capital (IC) thinking and ICounting can be part of the cure for this.
First of all, IC uses a detailed inventory of the key drivers of corporate success. The financials used as current measures of success were designed to show the operational cycle of a manufacturing business. If you are buying raw materials and converting them to finished goods, the income statement, balance sheet and cash flow statement are powerful tools for understanding how things are going.
If you are solving problems and innovating using computers, data and knowledge, these financial statements are worse than useless. Yes, they show the ultimate profit number, but they totally miss the operations of the knowledge factory driving those numbers, including the strength of your people, relationships, knowledge base and culture. And the financials treat investments in these intangibles as expenses, leading many managers to cut expenses and wipe out their most important productive assets at the first sign of trouble. (See open source tools to conduct and present these inventories here)
This skewed accounting has lead us to the point where 80% of the value of the average business is intangible. But no one has good data about where this value comes from. This leads to the second contribution of ICounting: it generates measures of these intangibles to support thinking about long-term value creation. When business was dependent on tangible assets on the balance sheet (equipment and factories), it was possible to “see” the value of the productive assets. Companies were held responsible for taking care of their physical plants. Today, business is dependent instead on intangibles assets (human, relationship, strategic and structural knowledge). But since none of this value is measured or tracked, no one holds management teams responsible for the care of their intangible productive capacity.
How do we in the ICounting movement measure intangibles? It’s an answer that I think Drucker would like since he often said that the most important thing for a company is to create and keep a customer. He also wrote about the importance of people in knowledge-based businesses (which today is just about every business). ICounting considers this entire ecosystem.
ICounting measures intangibles by listening to and tapping the wisdom of corporate stakeholders: managers, employees, customers and partners. These stakeholders know better than anyone how well a company is doing. If you have consensus among all these varied stakeholders, you have a very compelling measure of the strength of the organization (lack of consensus brings its own message).
Listening to all the people invested in your success is a powerful path to long-term thinking.
This approach is a primitive proxy for what I believe will ultimately be the future of enterprise resource planning (ERP) measurement systems: continuous outside-in stakeholder metrics. In today’s social technology-fueled markets, companies are vulnerable (as they should be) to the reactions of stakeholders at every touch point between the their operations and their customers and communities. In this world, outside-in metrics are much more important that the traditional inside-out corporate measurement systems used today based on financial and quantitative metrics.
It’s still right for an organization to return value to its shareholders. But this should be sustainable, long-term value. That kind of shareholder value can only come by thinking first about stakeholders. So what better way to build this kind of value than by measuring stakeholder experience with the organization?
I hope that we can continue this conversation. Many, many people know in their minds and hearts that the future of our companies and our economies will require greater long-term thinking. The ability to measure and manager intangible capital is a key part of this conversation. Do you agree? I look forward to hearing feedback.