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Wealth creation – Just cash, or is there more to it?

Written by Peter Ward, 27 October 2022

Time to redefine true wealth creation and construct guiding measures for long-term genuine success


I am struggling with the definition of corporate success. Scanning through articles on departing CEOs, most seem to be judged by shareholder value created, largely through dividends and share price. But what if the cash generated was at the expense of other forms of capital?


I am an accountant and while not practicing anymore, proud that I have been seen as a ‘bean counter’. When faced with this endearing interpretation of our role, we accountants would respond with a cheery ‘yes, and we determine what counts as a bean’.


Perhaps there is a need to redefine what counts.


Over the years, reporting has become more and more demanding as we strive for accuracy, fair presentation and a basis for comparing performance with others in the market. But I wonder whether we might be losing our way when it comes to determining what might count as ‘a bean’? What is it that is included in ‘the bottom line’ and what is excluded?


Let's start with questioning what is an investment and stays on the balance sheet and what gets expensed to the profit and loss account. To illustrate, a story from recent experience:


Recently I booked a service visit from a stair lift company. They were unable to volunteer a time within their service contract and when we did get a visit scheduled, it was postponed because their service vehicle had broken down. Given the general level of reliability of modern vehicles, I think it is fair for me to assume that (just perhaps) there have been restrictions on service expenditure, or even a delay in replacing the fleet of vehicles. Given the delay in meeting their contract obligations, maybe there are also economies being made in service department headcount. So, here we have (potentially) a business trading current profits for future performance downgrade. And the way that compensation arrangements work, it is possible that there is a management team cashing in their bonuses, based on current profits, for a job apparently well done.


I appreciate that a lot of effort has been invested to ensure reporting is not distorted and is consistent. My point is, in ignoring elements of expense that hit the income statement in one year, we may be driving the wrong mindset and behaviour.


It is too easy for a business under pressure to postpone, or even cut back, on both routine maintenance and major refurbishment, to improve the bottom line. Storing up problems for future years doesn’t seem to be recognised as important when looking at the financial well-being of a business. Research and development might be curtailed for similar reasons and training and development seems to be destined to a yo-yo treatment from year to year. Intelligent users of financial information know how to spot those businesses that have been cutting back on necessary spend for future prosperity but, surely, we should not be condoning a system that encourages short- term thinking in day-to-day trading.


With a slightly longer time frame in mind, I wonder whether the way that products have developed might have been different if the accounting had been different. Let’s consider Henry Ford’s Model T rolling out of the factory in 1908. Supposing ‘what counts as a bean’ was defined as the lifetime cost of the vehicle. This might have required an understanding of the end-of-life cost of disposal. Back then, the materials used could have been recycled (not too many plastics involved!). Had this established an accounting convention, I wonder whether we would have seen a different approach to building later motor vehicles with less emphasis on cheaper components and more on their recyclability. Perhaps the notion of building in obsolescence into new products would have taken a different course. Now apply this thinking to the white goods industries where cost competitiveness has dominated the thinking rather than value over time; it is possible that an accounting convention could have changed the way products develop.


Allied to the long-term thinking, there is then the tricky matter of costing in the impact of a product, or service, on other aspects of society. We are pretty good at costing in things we can see, but what about the things we can’t? Yes, there are the end-of-life costs and we are now making a fist at the environmental impact of disposal. But how good are we at accounting for our overall impact on society of which we are a part? I wonder at the potential impact of costing in the air that we breathe. We cost in land and water, so why not the atmosphere? And would different accounting treatments have maintained milk in milk bottles and mobile phones built to last for, I don’t know, 10 years or more?


All this may seem fanciful, but the reality is that we have enabled the financial measures to take over our lives.


I was interested to read about Ryan Gellert, entrusted with the future of Patagonia, (described in the Times article as a ‘global brand-cum-climate activist’) and his views on business in general:


‘The business sector loves to hide behind two faulty sentiments. One is the notion that the No. 1 rule of business is to maximise shareholder wealth. And the other is that the way you measure success…is growth’


Add to that the increasing toxicity of the short term and you have created a share price-obsessed, financially bound, definition of what success looks like.


I can hear screams of anguish from the HR community: ‘our employee satisfaction results are an integral part of our definition of success’ and from the marketing community: ‘customer satisfaction data forms a significant part of our assessment of CEO success’. Add to this the legitimate cry that we are spending more time on ESG (Environmental, Social and Governance) measures. But I would counter with numerous examples of short-cuts taken, with adverse customer and employee impacts as soon as shareholder returns are threatened. Financial measures dominate, even if the longer-term impact is likely to be negative. And possibly negative for some of the shareholders: if we look behind the generality of ‘shareholder’ we will see, for example, beneficiaries of pension funds who might well judge ‘value’ differently.


Is this a cry for more reporting, for more indicators of our impact on all stakeholders? That might be a by-product of what is needed: decisions made with a view to optimising wealth creation.


And wealth defined more broadly to cover all forms of capital and to include: intellectual (our actions should lead to an increase in our ability to create new opportunities); relationship (our actions should lead to improved relationships with customers, suppliers, and others essential to our own well-being); environmental (our actions should impact on the continuity of natural resources) as well as financial. Without robust indicators, there is a danger of us converting other forms of capital into cash rather than genuinely creating new wealth.


The accountant in me will still want to see robust financial measures. The financial discipline will continue to be an important aspect of a well-run, wealth creating business. But only one aspect of the process. What if a chief executive had an ‘always on’ dashboard, reflecting sensors attached to every part of the business and every key relationship. There would be red, amber and green indicators on each and a successful business would see the indicators flickering between green and amber (nothing stays constant and continuous improvement will need to be baked into the system). Again, possibly fanciful this may be but creating a business model that ties in leading indicators with eventual results, should be at the heart of every corporate engine room.


I would not be quite so damning as Ryan about ‘growth’ as I can see dangers in complacency and lack of ambition as a threat to an organisation. But I would be looking to define growth in a broader sense: growing in impact on relationships, the environment and intellectual horsepower. And re-reading Patagonia’s stance, I can see that they believe the growth they will be seeking will be on their impact on the environment. Their business model is designed to make it happen.


So, a call to all proud bean-counters. Perhaps it is time to spend time redefining what counts as a bean and possibly reflect on the damage unintentionally caused by an over-emphasis on the financials. Let’s spend more time on understanding the measurement of wealth, rather than striving for ever more accurate reporting of financial wealth.


Do our success measures track growth in all forms of capital or just its conversion to financial capital?


Image courtesy of: www.shutterstock.com


Peter Ward is Chairman and Co-Founder of Telos Partners, an advisory business focused on long-term business success



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