A Simpler Way

 

shared-value-venn

Photo from the 3pillars network. http://www.3pillarsnetwork.com.au/wp-content/uploads/2015/12/shared-value-venn.png

       All of the discussions surrounding the future of business tend to be hyper income statement focused. It makes sense… even to the most business savvy stakeholders its human nature to make the income statement central to any discussion surrounding business organizational behavior. When examining human motivation factors we see research that is designed to examine psychological motivational triggers that result in higher revenues. When examining holistic value creation with the concept of “shared value” we are asked to look at how businesses redefine revenue. In many of the discussions surrounding the future of business we are given complex arguments that ultimately boil down to making long term investments that result in increased revenues, lower costs, better products and sustainable production. I have been left wondering… Why do we need to make this so darn complicated? Why is it that these decisions are so income statement focused? Where have the other financial statements gone?

       In the Porter article, we were given an argument for refocusing corporate CSR efforts towards value creation by marrying profit seeking with social responsibility. We are told that traditional business models see social value capture as irrational as social welfare endeavors will result in expenses that aren’t justified from a profit perspective. We are also given (fairly intuitive) evidence that corporations that fail to invest in capturing shared value are subject to lower long run profitability and supply chain risk. In essence the pursuit of short term profitability often ignores shared value opportunities and ultimately results in loss of potential income down the road. 

       This is a simple balance sheet issue. If investments in capturing shared value come at higher upfront costs but yield increased profitability over time, why are we so darn focused with the profit and loss numbers. These additional investments should be capitalized and captured as assets on balance sheets. These capital assets can then be amortized as revenues related to these investments are generated. By doing this, we don’t need to worry so much about the whole chicken vs. egg issue regarding short term losses related to long term gains. If the market were to consider the financial statements as a whole market participants that fail to invest in shared value infrastructure would suffer. Market analysts should look for investments in non traditional assets that capture shared value opportunity. Items related to supply chain sustainability, attempts at creating socially conscious products that meet future market needs (R&D), and investments in firm well-being such as training and or providing socially responsible office space (capital leases and or assets on balance sheet) should indicate competitive, sustainable, profitability. If these types of capital investments result in above market returns the market should be able to incorporate these investments in their pricing models.

       In summary, I don’t think there needs to be a “revolution in capitalism” but rather we simply need to do a better job at reporting data that proves that shared value investment results in better long run returns. We have the financial reporting tools to capture this data and if there truly is a competitive advantage created by investing in nontraditional capital assets, the market will be quick to adopt these competitive practices.

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