What doesn't get measured, gets ignored

30 June 2011

The old adage of "What gets measured, gets done" has been around for many generations.  It's been embraced over the decades by many prominent business gurus and writers but has its roots in the age where human and mechanical productivity were for the first time seen as the source of competitive advantage and financial success.

In recent centuries the most powerful and dominant measure of success has been financial profit. It plays centre stage in our capitalist system, it determines how capital is allocated and how corporate success is measured and is increasingly influential in the way society rewards different groups and individuals.  

For many decades we have recognised that a model which is overly focused on financial performance may not deliver a sustainable world. Most respectable companies have tried to measure other critical activities in the business by making a balanced scorecard central to the management dashboard.

But if we're honest, it’s the financial element that still dominates all that moves. One could perhaps accept this situation if the financial measurement system was efficient at capturing all the inputs needed to reflect the contribution of business to society. Unfortunately, as we know this is not the case. It's not that accountants aren't diligent people, they are, it’s just that the model they've been asked to operate is incomplete and constructed for a different time.

Puma, the German sports lifestyle company, brought this home in a stark way a few weeks ago. In reporting an unprecedented environmental profit and loss account, it cut its reported profit of €200m  in half, by highlighting that a valuation of the environmental impacts caused by greenhouse gas emissions and water consumption along its supply chain would result in an estimated additional financial cost of €100m.

While this is an emerging field of reporting, it is a stark reminder of the inadequacy of the current financial measurement model. This ground-breaking analysis poses so many questions for the system that need to be answered on how we measure corporate success, and the knock-on effects into how the capital markets allocate capital and how wealth is distributed between key stakeholder groups. If we had to cut the pie in half, who gets what?

Importantly, Puma's analysis highlights the risk that exists to the world of continuing to push an outdated reporting model - "if it doesn't get measured, human nature has a strong tendency to ignore it". The analysis highlights the opportunity to use the reporting model as a change mechanism, for a radical rethink of business and its critical contribution to the future sustainability of the world.

Interestingly, this is what Puma are using the analysis to achieve, but for them it’s about competitive advantage, their brand, consumer behaviour, sustainable products and, yes their contribution to society.

As always, I'd be delighted to hear your thoughts and opinions on this matter

David

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Comments

Angelo, thank you for your enquiry. Puma's environmental P&L was created separately from the normal financial report and therefore the implied costs of the analysis fall outside the established regulatory reporting model and tax system. I would suggest that it is only a matter of time before these issues are embraced by the mainstream regulatory model, including tax - although having a high cost environmental footprint I might suggest is unlikely to result in a larger tax deduction and a small tax bill. On the contrary, those with small environmental footprints are likely to be the ones who will receive favourable tax credits.

David

As the sustainability is also a matter of the Government was the estimated additional financial cost of €100m accepted by Tax Authorities on computing the taxable income?

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