Overview
This is the first installment of a multipart series on how CPAs can attain a broader view of value creation by looking beyond shareholder value. This post explores how CPAs can qualitatively measure contributions to societal value using a “T-Account Assessment Approach” that looks at the following four factors:
1. Stakeholder Orientation
2. Intangible Assets
3. Commons
4. Access
These factors are further discussed in section 4. But before looking at these factors in detail, we look at why the concentration/distribution of value is important in the first place.
Section 1 explores the rationale of the need to go beyond the idea of ‘shareholder value.’ In Section 2, the productivity-poverty paradox looks at how impoverishment continues to occur during times of plenty. Finally, section 3 expands on the social license concept introduced by CPA Canada in Section 1.
Section 1: Beyond Shareholder Value
One of the initiatives that emerged from CPA Canada’s Foresight Initiative was Value Creation. The goal, however, was not to restrict the value to financial performance. Instead, it was to look at a broader concept of value:
“Organizations are not only judged on their financial performance, but how well they create long-term value from intangibles such as brands, relationships, data, and other forms of intellectual capital. Executives are challenged to make decisions that consider their organization’s impact on the natural environment, on its stakeholders, and on the communities within which it operates.”
Value Creation Decisions and Measurement Primer (available here) delves deeper into this concept, noting:
“Value stream models should reflect multiple stakeholder perspectives. Solely measuring performance from a shareholder perspective is inadequate with respect to value creation. A well-performing organization must create value for all stakeholders: customers (or it won’t have revenues), employees (or it won’t be able to keep them), suppliers and business partners (or it won’t have access to needed resources), and for the communities and societies it operates in (or it won’t have a social license to operate).” [emphasis added]
CPA Canada is not alone in the understanding. For example, the Business Roundtable, representing the top companies, had 181 CEOs sign-off on the idea that they should be: “Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.”
This stance is a significant departure from the traditional economic approach that has been embraced. The conventional idea was that corporation’s sole focus was only shareholder value. Perhaps, this was best articulated by Milton Friedman, from the Chicago School of Economics, who said:
The broad thinking proposed by CPA Canada is something that originated from the Foresight initiative. During the Foresight sessions themselves, there was an agreement on several social issues. For example, there was no debate around the importance of environmental problems. When it came to economics, there was also consensus around the issue of wealth inequality. However, raising the issue was a moment of internal debate, as it wasn’t clear that there would be wide acceptance. Instead, I expected the audience would dismiss the idea outright. Consequently, the idea to expand the definition of value to encompass society is a fair reflection of the sessions themselves, reflecting the greater consciousness articulated by the attendees.
In terms of wealth inequality itself, the stats are easy to find.
In 2017, Oxfam found that the “world’s eight richest billionaires control the same wealth between them as the poorest half of the globe’s population.” In Canada, the organization found that the “country’s 44 billionaires ― as listed by Forbes magazine ― have collectively added $63.5 billion in wealth since stock and bond markets began recovering in March of 2020.” And in the US, Bloomberg reported that “the top 1% of Americans have a combined net worth of $34.2 trillion, the poorest 50% — about 165 million people — hold just $2.08 trillion, or 1.9% of all household wealth.”
However, it’s not only Oxfam that’s concerned.
The billionaire Ray Dalio is also alarmed about the situation on a LinkedIn post:
“There has been little or no real income growth for most people for decades. As shown in the chart below on the left, prime-age workers in the bottom 60% have had no real (i.e., inflation-adjusted) income growth since 1980. That was at a time when incomes for the top 10% have doubled and those of the top 1% have tripled.[i]… the percentage of children who grow up to earn more than their parents has fallen from 90% in 1970 to 50% today. That’s for the population as a whole. For most of those in the lower 60%, the prospects are worse.”
He even goes so far as to say that “Capitalism is basically not working for the majority of people” and that “[t]he most pressing problem I see right now is the wealth and opportunity polarity gap, that’s the big source of conflict…American leadership should declare the opportunity gap as a national emergency”.
But he’s not the only billionaire concerned.
In a Ted Talk, Nick Hanauer speaks directly to the issue of how wealth inequality will result in the revoking of the societal license of the current economic model. In “Beware, fellow plutocrats, the pitchforks are coming,” he warns:
“So what do I see in our future today, you ask? I see pitchforks, as in angry mobs with pitchforks, because while people like us plutocrats are living beyond the dreams of avarice, the other 99 percent of our fellow citizens are falling farther and farther behind…And if wealth, power, and income continue to concentrate at the very tippy top, our society will change from a capitalist democracy to a neo-feudalist rentier society like 18th-century France. That was France before the revolution and the mobs with the pitchfork… You show me a highly unequal society, and I will show you a police state or an uprising. The pitchforks will come for us if we do not address this. It’s not a matter of if, it’s when. And it will be terrible when they come for everyone, but particularly for people like us plutocrats.” [emphasis added]
Section 2: Productivity-Poverty Paradox
The issue here is not the generation of wealth but rather its lack of circulation in society. GDP, for example, grew in the US grew from $14.4 trillion to $16.6 trillion (between 2007 to 2014). Yet, during the same period, the number of poor people didn’t fall. Instead, it rose from 37.3 million people in 2007 to 46.5 million people in 2014. So, even though the GDP grew by over $2 trillion, there were 9.2 million more poor people. Consequently, those trillions of dollars added to the economy for seven years did not improve the welfare of 15% of the US population.
More broadly, the money that is extracted is idle. According to Blackrock, about $70 trillion has been “stockpiled” by investors simply as cash. And of that amount, “$10 trillion of the cash is effectively earning a negative yield, eroding savings”.
This issue is not limited to the US but is commonplace around the developed countries. For example, looking at food insecurity in Canada, we find that “1 in 8 households in Canada is food insecure, amounting to over 4 million Canadians, including 1.15 million children, living in homes that struggle to put food on the table”. The site also noted that there was an increase in hunger from 2007–2008 to 2011 to 2012 from 1.4 million people to 1.6 million people. In the UK, “in 2014 more than 8 million people lived in households that struggled to put food on the table, with more than half regularly going a whole day without eating”. With a 2014 population of about 64 million, that is about 1 in 8 people going hungry.
Perhaps what is even more surprising is the issue of clothing:
· In Canada, a survey found that 17% were “unable to afford warm winter clothes.” In addition, 39% of Canadians were “unable to buy new clothes when they’re needed.”
· In the EU, 17% “could not afford to replace worn-out clothes.”
· In the US, the LA Times reported that “20% of children are part of families that can’t afford clothes, food or other basic necessities” in California.
Several charities are out there attempting to fill the gap. For example, a charity in Canada’s capital distributes 16,000 snowsuits to children every year. In the US, Operation School Bell supports +6,700 kids in LA with new clothes — for the last 52 years.
Section 3: When does society revoke “the social license to operate”?
In broadening the focus, CPA Canada suggests that value creation initiatives need to create value for customers and employees — no just shareholders. However, organizations focus on these two areas via strategic/marketing and human resource initiatives, respectively. It is the latter element that requires further discussion. Specifically:
“A well-performing organization must create value for all stakeholders…for the communities and societies it operates in (or it won’t have a social license to operate).”
What is recognized is the link between societal attitudes and commercial activities. This is in contrast with defining society as just individuals. Instead, societies operate because there is a consensus around how to work together. Thus, for example, the recent debate whether drivers in the gig economy should be defined as “independent contractors” or “employees.” California had put forth proposition 22 that required companies, like Uber, Lyft, and others: “classify them [gig workers] as regular employees and grant them relevant benefits.” The companies likely realized how such a proposition would impact them and spent “nearly $200 million on the campaign, their argument was that the law was unduly restrictive”. That’s a significant sum to pay. Moreover, it illustrates how much companies are willing to pay to buy the “social license” from society.
Consequently, when looking at the production-poverty paradox, the question is: when does society revoke the social license on “business as usual”? As Hanauer and Dalio — both who have made billions on “business as usual” — warn that such disparities are not socially sustainable and have a high risk of impacting societal harmony.
Section 4: Assessing Societal Value: Factors to consider
Overview of the T-Account Assessment Approach
When looking at investments a company will make, CPAs can qualitatively assess how an investment or strategic initiative can impact the concentration-distribution level on a particular project. The following factors should be considered when exploring how the societal value generated will be concentrated or distributed.
Each factor is assessed qualitatively as to (1) whether it is a debit (asset) or credit (liability) to societal value and (2) how much impact it has (high, medium, low). Then an aggregate assessment is done on the overall T-Account. For example, a sample T-Account that has a net positive contribution to society would look as follows:
#1 Assessing stakeholder orientation
Conceptually, there is recognition that shareholder value is not sufficient. However, legally publicly listed companies are structured to serve the interests of shareholders. Part of the challenge is the corporate structure itself. The limited liability enjoyed by shareholders creates incentives to protect the investment but not necessarily the community. As noted in the Cambridge Journal of Economics:
“The curious shareholder mindset that this regime encourages was recently throw into sharp relief by two cases involving the former Railtrack. In October 2005, the High Court ruled against the Railtrack Private Shareholders Action Group (RPSAG) in their action against the Secretary of State for Transport, Stephen Byers (Weir v. Sec of State for Transport). Following a sustained and determined campaign, over 48,000 of the company’s shareholders, outraged by the decline in the value of their shares, had clubbed together to raise over £4 million to challenge Byers’ decision to force the company into administration. Alleging misfeasance in public office and breaches of the Human Rights Act 1998, they argued in effect that their property had been expropriated without proper compensation. Just one week before the court handed down its decision, Network Rail (the company that replaced Railtrack) and the engineering firm Balfour Beatty had been fined £13.5 million for their part in the Hatfield rail disaster of 2000 in which four people died. Hatfield was one of a long series of fatal rail accidents in which Railtrack’s working practices and safety record was implicated. On this issue the shareholders were silent. At no point had they spoken up, let alone campaigned, about the company’s safety record.”
Cooperative models, B-corps, benefit corporations and zebra companies, and the classic partnership structure are alternatives models to the corporation. However, the main form that dominates the business world continues to be the corporation. With that in mind, companies do recognize that they need to contribute value to other stakeholders, so there can be room for such companies to contribute value to the community. But it remains to be seen whether such changes will reverse the current concentration of wealth that we observe.
Evaluation Guidance:
Structural assessment:
The first thing to assess is whether the structure enables/hinders the delivery of value to the community. For example, Michael Dell felt encumbered by the public company model and took “his” company, Dell Computers, private. Consequently, a company can choose a structure that is more conducive to delivering communal values. For example, there are nearly 4,000 B Corps, including Ben & Jerry’s, Danone North America, and Patagonia.
We should also note that the other legal structures can also be problematic. Companies, for example, can give up their B Corp status:
“One challenge for long-term goals is that a company can decide to decertify at any time. The most notable recent example of this is Etsy, which gave up its B Corp status in 2017 when a new CEO was put in place who didn’t share the same priorities as the ousted CEO, Chad Dickerson, who had taken the company public.” [original link maintained]
Project assessment:
Most companies, however, are not cooperatives, B-corps, benefit corporations, zebra companies, or partnerships. Consequently, CPAs can look at whether an individual project or investment is aiding the overall distribution of value or not.
When evaluating the project using this factor, it is to assess how much focus is placed on achieving societal benefit compared to shareholder benefit. There can be situations where there is a mutual benefit. For example, companies can contribute to communities where it can be shown that the net benefit of such contribution brings to the bottom line. For example, Airbnb worked to ban customers who had racist views. Arguably, this meant less revenue in the short term. However, such actions are ultimately justified because the overall revenues will be higher because such gestures build goodwill with the community. Similarly, CVS eventually stopped selling cigarettes.
#2 Assessing Openness of Intangible Assets
When looking at intellectual property, organizations can take a proprietary approach or an open-source approach. With the issue of drugs and health, the impact of patent-free approaches to medicine can help ameliorate the conditions for all. For example, the US administration looked to waive patents related to the COVID-19 vaccine. The argument is obvious: vaccinating all people will help society to get past the pandemic and go back to “normal.”
Historically, it’s been challenging to see the benefit of open-source software. Microsoft’s revenue model in the 1980s was based on a closed approach to software. However, with the rise of Linux, Google’s Android software, and IBM’s $34 billion purchase of Red Hat (Red Hat provides services around Linux), it’s clearer to see how open-source software can co-exist with other business models. Even Microsoft now sees the value of open-source software.
Evaluation guidance:
When companies develop intangible assets, they need to determine whether they will keep them proprietary and sue stakeholders for intellectual property infringement or go for an open model. Those who opt for the latter can choose from the different open source licenses to suit their needs. It is prudent to work with legal counsel to understand the implication of the various models.
#3 Assessing the Preservation of the Digital Commons
The concept of “the commons” is not new and goes back to the idea of common land. Take, for example, medieval England:
“The commons is a fundamental social institution that has a history going back through our own colonial experience to a body of English common law which antedates the Roman conquest. That law recognized that in societies there are some environmental objects which have never been, and should never be, exclusively appropriated to any individual or group of individuals. In England the classic example of the commons is the pasturage set aside for public use…”
These lands were enclosed and then privatized as part of the land reforms between 1760 and 1830.
Arguably, the Internet has gone through a similar transition. David Weinberger, author and senior researcher at Havard’s Berkman Center, summarized the initial promise of the Internet this way:
“The web also enabled the development of social forms that seemed to me to be essential to us as humans: the collaborative, iterative generation of a linked infrastructure of ideas and meaning; permission-free contributions and access; lowered economic barriers to participation; manifestations of bottom-up power; self-creation of a personal presence within a social network formed free of some of the usual irrational hindrances; connections across cultures and differences.”
Facebook, Google, and Amazon became billion-dollar companies precisely because of the “lowered economic barriers to participation” that enabled them to access the masses and the masses to access them. For example, Google adopted the motto “Don’t be evil,” arguably reflecting this mindset. Larry Page and Sergey Brin, the founders of Google, “were aiming big with “societal goals” to “organise the world’s information and make it universally accessible and useful.”
Like what happened in 18th century England, Google began closing the digital commons they had de facto been appointed over. The company abandoned its role as the neutral gatekeeper. It began to use its monopoly over search to help boost its other products. For example, Founders.com went from being from the first site found to “languishing on Google, mired 12 or 15 or 64 or 170 pages down. On other search engines, like MSN Search and Yahoo, Foundem still ranked high.” Google’s role in demoting their rank became apparent once the search giant whitelisted the domain. The company “instantly saw traffic from Google search jump by “around 10,000 per cent”. This, however, was not a one-off but a larger pattern. Wired reported that “…Google’s gaming of its rankings was growing more pervasive. The focus was its product comparison service, which went by the name of “Froogle.” The service wasn’t popular: a 2006 internal document, uncovered by the Competition Commission, admitted that “Froogle simply doesn’t work.” So, in 2008, Google rebranded it “Google Product Search” and started boosting it to the top of search results — an in-house version of black hat SEO. At the same time, it artificially demoted rival sites in the same way as Foundem: down to, the Competition Commission found, a minimum of page four on average, causing drops in traffic of 90 per cent.” [emphasis added, original links maintained]
Google does not have a legal obligation to users in delivering unbiased results. However, users expect Google to ensure that the algorithm is neutral. Consequently, engaging in such behaviour is at a high risk of society revoking Google’s social license. Although they continue to operate, Google was handed an anti-trust fine of €2.42 billion.
Google is not the only tech company that is under scrutiny for such monopolistic practices. European or American regulators are also scrutinizing Amazon, Twitter, Facebook, and Apple.
Another company that illustrates how a company control what is believed to be “common” is Amazon. Amazon controls 60% to 80% of the e-book market and 64% of regular books. This control of e-commerce enabled Amazon to host Amazon Marketplace, where third parties can sell on its site. However, they have been criticized for using their ownership of the online marketplace to gain access to strategic data of their “partners” to then compete with them. European Commission, for example, “takes issue with Amazon systematically relying on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon’s own retail business, which directly competes with those third party sellers.”
Although Amazon rejects this claim, a Wall Street Journal investigation seems to corroborate the Commission’s concerns:
“…interviews with more than 20 former employees of Amazon’s private-label business and documents reviewed by The Wall Street Journal reveal that employees did just that. Such information can help Amazon decide how to price an item, which features to copy or whether to enter a product segment based on its earning potential, according to people familiar with the practice, including a current employee and some former employees who participated in it…In one instance, Amazon employees accessed documents and data about a bestselling car-trunk organizer sold by a third-party vendor. The information included total sales, how much the vendor paid Amazon for marketing and shipping, and how much Amazon made on each sale. Amazon’s private-label arm later introduced its own car-trunk organizers.”
As with Google, there likely is no legal obligation for Amazon not to use their partner data. However, the user expects Amazon to keep this data proprietary and to “play fair.” Without such fair play, there is a higher risk that they will lose their social license.
Evaluation criteria: This factor applies mainly to the large tech players that act as gatekeepers. The US Congress investigation into Amazon found that:
“For sellers, Amazon functions as a “quasi-state,” and many “[s]ellers are more worried about a case being opened on Amazon than in actual court…because Amazon’s internal dispute resolution system is characterized by uncertainty, unresponsiveness, and opaque decision-making processes.” [Emphasis added].
Some may argue that sellers can go elsewhere. However, this ignores how the traditional market square was a public place where people could buy and sell. Amazon essentially owns the equivalent of this online.
Companies that hold themselves to standards or ensure that such offerings are perceived to be held in common would be deemed to contribute value to the community. Conversely, when companies use their position to transfer value from the commons to their shareholders, this would end up on the credit side of the T-Account assessment.
#4 Evaluating Access to Proprietary Platforms
Companies can leverage different models to provide access to their offerings ranging from “freemium” to pay-per-use. Chris Andersen, when he was the editor of Wired, articulated the underlying economics of digital infrastructure as follows:
“The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero…But tell that to the poor CIO who just shelled out six figures to buy another rack of servers. Technology sure doesn’t feel free when you’re buying it by the gross. Yet if you look at it from the other side of the fat pipe, the economics change. That expensive bank of hard drives (fixed costs) can serve tens of thousands of users (marginal costs). The Web is all about scale, finding ways to attract the most users for centralized resources, spreading those costs over larger and larger audiences as the technology gets more and more capable. It’s not about the cost of the equipment in the racks at the data center; it’s about what that equipment can do. And every year, like some sort of magic clockwork, it does more and more for less and less, bringing the marginal costs of technology in the units that we individuals consume closer to zero.”
Evaluation guidance: Offerings that leverage freeconomics and offer tools, services and the like to the community enable distribution. Those that focus on subscription and other fees are cultivating concentration. For example, Adobe for its Creative Cloud (which includes Premiere Pro and Photoshop) is offered as a free trial and costs over $50/month. Students and educators are offered a discounted rate ($20), but it’s not free. On the other hand, DaVinci Resolve provides a free version and a premium version for $295.
An excellent example of getting on the debit side of the T-Account are companies who made their offerings accessible to the community during the pandemic. Zencastr, which enables podcasters to record interviews, lifted “limits on recording hours or participants for Hobbyist users.” By leveraging freeconomics, the company allowed the community to benefit from the platform.
Concluding thoughts
For CPAs to measure intangibles beyond financial performance is new territory. Additional work will need to be done to determine what factors should be added to the preceding assessment, as well as how to refine the criteria suggested.
The opinions expressed herein are Malik’s own and do not represent that of his employer(s). He does not endorse any of the products, services or other offerings raised within this or other posts. Any such commercial offerings are included solely for illustrative purposes.
