US founding father Benjamin Franklin once observed: “I believe that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.”
Franklin’s insight, predated by many years the creation of the joint stock, limited liability enterprise, the dominant form of the modern publicly listed corporation. But how prescient was he in relation to contemporary approaches to measuring corporate value, a field replete with Franklin’s “false estimates”? Asset owners and managers obsess over hourly, daily, and monthly swings in share price. Quarterly earnings reports rivet analysts. Investors track earnings per share to inform portfolio management. Short-term returns to finance capital rules the mind of the market, leaving little room for attention and reward to other capitals essential to prosperous business and societies. The electronic ticker-tape dashing across the bottom of computer monitors has become the icon of rampant short-termism and the fleeting metric of corporate value.
The disconnect between short-term financial indicators and ecological wellbeing is evident even to the casual observer. As the Dow Jones Industrial Average hovers near a record level of 14,000+ (doubling since early 2009), unemployment remains stubbornly high and income inequality deepens. Were Franklin to observe such reports, he surely would be left befuddled by the contradictions that, at once, witness soaring share prices juxtaposed with recessionary macro-economic conditions. How can corporate stock fortunes be on the upswing while macro-indicators remain depressed? Given the pivotal role of corporations in driving economic prosperity – 1,000 of the world’s largest companies represent $32tn (£21tn) in revenues and 49% of market cap – shouldn’t stock market optimism correlate at least moderately with positive trends in employment, household income, and other measures of wellbeing? Or are the dominant yardsticks of corporate value so flawed that they bear little relationship to multiple forms of value creation – past, present, and future – that current measures ignore?
Consider the dramatic shifts in share price of Apple during the last few months. For years it has been a market favourite, notwithstanding investor displeasure with the company’s hoarding cash and stingy dividend payments. But even Apple is learning that rising share price cannot go on forever. Over a six-month period ending 1 February share price fell almost one-third, wiping out billions of dollars in market cap, a stunning downward spiral. Yet, in the same period, the company sold tens of millions of iPhones, iPads, and iPods globally and employed tens of thousands of workers in hundreds of outlets worldwide and countless others in supplier factories. Of course, analysts will say that what matters are its long-term prospects in terms of new products, market competitiveness, and the durability of premium pricing of its products. But even with these uncertainties, can a company’s true value drop by one-third in a matter of months, even as the company continues to innovate, sell, and employ? By today’s myopic measure of value, the answer is yes.
The challenge of defining and measuring true value is not confined to companies. For years, critics of gross national product – basically an aggregate measure of monetised market transactions – have sought to dethrone this metric in favour of more expansive measures of a nation’s wellbeing. In the same vein, one can imagine a future in which a company’s wellbeing shifts from the narrow confines of market cap and earnings per share to a more nuanced and inclusive perspective of its present and future performance.
“Vital capitals” is one such approach. The concept is rooted in the reality of how companies actually create value. Finance capital, of course, is an essential ingredient. But in the prevailing paradigm of success as a function of return to capital owners, aka shareholder value, finance capital is mistaken for an end rather than a means. The other vital capitals – human, intellectual, social, natural – lie at the heart of long-term value creation of any organisation. Collectively, they constitute the engine that drives long-term business prosperity. Their stewardship and enhancement must achieve, at a minimum, parity with finance capital in assessing company performance and prospects.
But there’s hope. The emergence of concepts such as “shared value,” “sustainable capitalism,” and “generative design” are beginning to reshape the discourse on corporate purpose, design, and performance. Vital capitals is visible in the language of the International Integrated Reporting Council, the Sustainability Accounting Standards Board, and the Global Initiative for Sustainability Ratings. This will not be an easy transformation. Champions of finance capital will not willingly relinquish their privileged position.
Flying in the fog of “false estimates” of real corporate value is a threat of planetary proportions. It can be fixed with fundamental shifts in measurement, reporting, and rating companies. Change is happening, but not fast enough. The collective voice of enlightened business, civil society, and government is needed to accelerate this necessary transformation. The planet’s, and society’s, patience is not limitless.
This article was originally published on the Guardian website
Dr. Allen L White is vice president of the Tellus Institute, co-founder of the Global Reporting Initiative, and founder of the Global Initiative for Sustainability Ratings