Getting over Financial & Economic Crises

The Financial Crises of 2007/08 is judged by many economists to be the worst financial crisis since the Great Depression of the 1930s. As a result of the 2008 crisis, significant financial institutions, notably banks and stock markets, lost trillions of $US. In turn housing markets lost value resulting in evictions, foreclosures and unemployment. People saw their savings, pensions and endowments loose overnight the kind of money that takes decades of hard work to save. We are still suffering from this crises as more key business suffer or fail, high street shops and house-hold names go out of business; and  the European sovereign-debt crisis has ruined countless lives  in Greece, Portugal, Spain, Ireland and now Cyprus.

The 2008 crisis took much of the Financial & Economic world by surprise in spite of global studies and close attention from all quarters. The causes of the crisis are difficult to identify and has given rise to extensive debate. It is a global crisis and all of us are involved. The search goes on for ways to stop it happening again.

A significant amount of blame for the crisis has to be the “financialization” of the economy:

Transition to Sustainable Business

PR identifies how the world is changing. The most fundamental change that PR identifies is one that lies at the foundation of our knowledge. This fundamental change determines how knowledge is made possible. This is in essence a very simple kind of change – BUT it is difficult to perceive and accept that so much can change as a result of so little!

Intrinsic Sustainable Development (ISD) (2011) is grounded in a change of “what makes knowledge possible”.  To explain this kind of change, ISD relies on the work of Michel Foucault (1970) who called the “possibility of knowledge” an EPISTEME.  Foucault described only three different epistemes in European history from Renaissance times to Classical and then the Modern. Foucault died in 1984 before any evidence of an emerging episteme to replace the Modern was available.

In ISD, an emerging episteme is identified and called “Primal”.  On a technical level, the change from the Modern to the Primal episteme is equivalent to going from abstract belief systems to empirically grounded science (or to be even more technical from an epistemology to an ontology). On a day to day level, this means that we shift from living according to overarching societal beliefs (in notably economics and free markets) to becoming part of the living world once more.

Such changes will have a huge impact on business. John Elkington (2013, p. 62) observes: “We need to redesign our, economies, politics and culture.” Elkington gave the world the “Triple Bottom Line” approach so that businesses would acknowledge their dependence upon achieving good social and environmental performances as well as economic. But in his review of “Corporation 2020: Transforming Business for Tomorrow’s World” (Sukhdev 2012), Elkington admits his approach has been wrong.

Elkington’s approach had been to tweak corporations, change their performance at the margins to improve social and environmental conditions without a change in business core values and activities.  But Elkington now sees this as the wrong approach and he writes “The challenge is now ecological, in a broader sense: we must reshape the context within which both the corporations and the investors operate…” (Elkington 2013, p. 62).

Reading “Corporation 2020: Transforming Business for Tomorrow’s World” (Sukhdev 2012) changed Elkington’s mind. Corporations 20:20 argues that we must as a matter of some urgency shift from a 1920’s corporate model of “free-market-capitalists” and “cost-externalising” to a 2020 corporate model with the following mission: 

            Corporation 20:20 MISSION

1. The purpose of the corporation is to harness private interests to serve the public interest.

2. Corporations shall accrue fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders.

3. Corporations shall operate sustainably, meeting the needs of the present generation without compromising the ability of future generations to meet their needs.

4. Corporations shall distribute their wealth equitably among those who contribute to its creation.

5. Corporations shall be governed in a manner that is participatory, transparent, ethical, and accountable.

6. Corporations shall not infringe on the right of natural persons to govern themselves, nor infringe on other universal human rights.

For more about Corporation 20:20 visit their website here.

The Transition of Industry

Returns on Growth Pains

ROCE stands for Return On Capital Employed. It underpins economic growth and is the most important equation of our times.

All accounting students learn how to calculate and use this equation within the details of corporate finance but we are all familiar with the concept. ROCE is stated as follows:

ROCE        =             Returns

                                                       Investment

It calculates the ratio between an investment and the amount of increase the investment earns. It is better known as a percentage rate of return. For example a company investing $10 million in a new product and making $2 million profit a year enjoys a 20% ROCE. If PR can afford to invest £10 in a savings account, he might make 20 pence in a year; a 2% ROCE.

If more people are to enjoy getting returns out of investments, then our economy needs to grow. This is the theory that motivates pretty well all business people and political leaders in the West and in the East. This makes ROCE an important equation – it represents our increasing prosperity and source of additional wealth.

Populating the Steady State Economy (SSE)

The Steady State Economy (SSE) as proposed by Herman Daly is a great and essential idea. He defines a SSE as: "an economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance throughput, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption."

The above definition is taken from the website of the Center for the Advancement of the Steady State Economy (CASSE) whose webpage may be found here.

PR encourages everyone to become familiar with the SSE because it is quite simply the only way mankind can survive! Elementary arithmetic plus a recognition of physical reality reveals that we cannot continue indefinitely taking resources from our planet. We are already witnessing this overconsumption right now and it is causing social stress and deprivation worldwide… imagine what problems there will be if we pursue economic growth for another hundred, or two hundred, or three hundred years! The kind of economics that now dominates our thinking has no future.

But what if economics thinking itself is the root cause of our present problems? If economics is a cause then presumably more economics, albeit of a different kind, is not the solution.

Get Real! –John Gray on Capitalism’s Delusions

John Nicholas Gray (1948 -) is a former London School of Economics and Political Science Professor. He is a well-published author of books and he contributes regularly to the UK national press including the Guardian newspaper.

John Gray promotes realistic thinking: “The meltdown of financial markets has done more than wipe out wealth on an unprecedented scale. It has also destroyed the neo-liberal belief in progress through ever expanding production and consumption, and an anxious search is under way for a replacement creed. Religious fundamentalism is one result of this quest, Green utopianism another. Intelligent improvisation – using technical fixes to reduce the human impact on the Earth, for example – is more likely to yield results that the search for solutions. But realistic thinking goes against the grain. It is easier to inhabit an imaginary future than deal with the intractable present.” (Gray 2009, p. xxv).

The above quotation was written in 2009 in a new preface to his book “False Dawn: The Delusions of Global Capitalism” which was first published in 1998. Gray’s 1998 prophetic vision on the delusions of global capitalism was proved to be correct one decade after publication.

In “False Dawn” Gray had argued that the effect of unrestricted international free enterprise will be socially and culturally destructive. It is also unsustainable. But Gray cannot be classified as a Green, as anti-growth, or as a return-to-nature thinker. Indeed Gray argues that a Green agenda, an anti-growth recognition of physical limits and a natural utopia are not tenable. He also argues not for sustainable development but for a “sustainable retreat”. (ibid.).

If Gray is against free enterprise, greens and sustainable development, what is it precisely that he does want?

Professor John Gray

John Gray wants realism; a knowledge and action undistorted by utopian ideals and beliefs. In particular he wants to rid the world of the propaganda that free markets are a natural state of human affairs. This is also a core argument of Primal Reporter.

 In “Straw Dogs: Thoughts on Humans and Other Animals”, John Gray (2002) challenges what it means to be human. He thereby touches upon another key PR idea – that the world is changing, and a new world, or episteme (Foucault 1970), is emerging. The book “Intrinsic Sustainable Development: epistemes, science, business and sustainability” (Birkin and Polesie 2011) is about the emerging episteme.

By referring to a new world, we have not of course found a new geographical expanse to enter. However, it is arguable that PR’s new world is an even more momentous event than that. What makes our knowledge possible is changing; and this changes what we know of the world and of ourselves. In this way a whole new world is made available to explore and with that all the thrills and opportunities of pioneering and discovery. Professor John Gray is yet another a harbinger of this change.

References

Birkin, F.K., and Polesie, T.  Intrinsic Sustainable Development: Epistemes, Science, Business and Sustainability. Singapore, World Scientific Press.

Foucault, M. (1989[1970]). The Order of Things: An Archaeology of the Human Sciences. London, Routledge.

Gray, J. (2002). Straw Dogs: Thoughts on Humans and Other Animals. London, Granta.

Gray, J. (2009[1998]). False Dawn: The Delusions of Global Capitalism. London, Granta.

The Accountant’s Economic Revolution # 02

“We need a Revolution of Capitalism to balance return on financial, natural and social capital.” So said Peter Bakker at the Prince's Accounting for Sustainability Forum at St. James’s Palace on December 19, 2012.

 

 

Peter is the president of the World Business Council for Sustainable Development (WBCSD) and a widely experienced business man from the Netherlands – find out more about Peter.

 

In his speech, Peter told us that if we are to have a future then business and accounting needs to change. In spite of all the business and accounting initiatives so far implemented, there has been nothing like enough progress. 

 

The Global Accounting Revolutionary Group

Peter made these points in contribution to the Accountant’s Economic Revolution:

 

#1 - Business as usual is not an option for a future-proofed economy. Too many business models and strategies are dependent on the notion that current economic principles and capitalism are static.  This is naïve. 

 

#2 - The conventional model for capitalism is found wanting in terms of the benefits to the majority of society, the impact on the planet, and even in terms of continued economic prosperity. 

 

#3 - Capitalism requires a new operating system, and needs to be re-booted if we are to avoid the ultimate recession or worse total collapse.

 

#4 - Business [and accounting] needs to listen to what the scientists are telling us. We must incorporate the knowledge around the Planetary Boundaries in the setting of priorities for solutions.

 

#5 - We need to consider whether current company reporting provides the right information for this radical transformation.

 

#6 - Sustainability performance needs to be integrated into strategy.

 

#7 - We must change the (accounting) rules of the game.

 

#8  - It is a revolution, a revolution of capitalism, not with the aim to overthrow it, but to improve it in a way that balances the economic, the natural and the social dimensions.

Follow this link for a summary of Peter's speech.

New Economic Order: David Korten

Is David Korten a pioneer of a new economic order? He was born in Longview, Washington in 1937 and was awarded an MBA and PhD from the Stanford University Graduate School of Business. He has taught on the Harvard Business School’s MBA and doctoral programmes. But he is far more exceptional than his brilliant academic career might indicate.

With David’s academic background and business know-how, conventional wisdom might have thought it likely that he would be a leader of some kind: perhaps a man destined to improve the business performance of America. Conventional wisdom was indeed correct on this point - but it is very unlikely it would have foreseen the nature of the improvements that David would want to make:

“Wall Street generates money in astonishing quantities through accounting tricks, financial bubbles, and debt pyramids without producing anything of real value.”

                                                From Capitalism and the Common Good, David Korten, 2012.

If Wall Street (and other financial markets) do not produce anything of real value than the legitimacy of the whole financial sector is challenged. This would indeed herald a new economic order. But where do David’s ideas come from? Are they sound?

It could be argued that David’s early, post-Stanford career from 1959 was unduly influential upon his young and passionate mind. He devoted himself to setting up business schools in low-income countries such as Ethiopia. In the developing world, David would certainly have seen the struggles, hardships and pain that might have aroused his sympathy and turned him against the securities and comforts of the American establishment. But he chose this career with the poor overseas – something within him had already turned before he even left the USA.

There is no suggestion here that David was in any way a latent Marxist; though he would have witnessed the McCarthy communist accusations in the USA, that Second Red Scare of the early 1950’s. After all, David was a business-studies student throughout that period.

But whatever resource, insight, compassion, understanding or humanity the younger David possessed that set him upon his life’s path, his later career consolidated his views. For 15 years from the late 1970s, David lived in South-east Asia and served as a Ford Foundation project specialist then as an Asia regional advisor to the United States Agency for International Development (USAID). He came to understand the root causes of development failure in South-east Asia. He began to see that the economic policies of the developed world including the USA and the UK were themselves the cause of global environmental and social crises.

Perhaps David gets his ideas by experiencing life on the outside, as it were, of the existing economic order. He got to know the downside of existing economics but unlike the millions who suffer in silence, David had the knowledge and skills to seek a solution.

Wherever his ideas came from, David is now famous for promoting a new kind of economic order. In Capitalism and the Common Good 2011, a speech David gave at the University of Oregon, he identified two kinds of economy, the existing and the emerging as follows:

The Existing Economy

“The greed-driven, money-serving, corporate-ruled Wall Street Economy measures its success exclusively by the financial profits it generates for the already rich. It neither acknowledges nor accepts responsibility for the economic, social, environmental, and political devastation it leaves in its wake.”

The Emerging Economy

“The democratic, community-rooted, market-based, life-serving Main Street economies that ordinary people are rebuilding across the nation and around the world measure success by their contribution to securing adequate and meaningful livelihoods for everyone in a balanced relationship to nature.”

David’s Emerging Economy is based on common sense, business and economic knowledge, and wide experience. But is there necessarily something else that David possesses? After all, how many business leaders in the Existing Economy posses these self-same qualities and they do not recognise the need for fundamental economic change?

What is that something else that enables David to see a world that his fellows simple cannot see? After all, it is that something else which means that David can see a new kind of economic order emerging whilst others think he is, at the best, deluded.

Does that something else have to do with epistemes, the possibilities of knowledge? An episteme change would certainly explain why David can see a wholly different world from many of his contemporaries. It is in the nature of episteme change that those with old knowledge possibilities cannot deal with, cannot see and appreciate, the new (Foucault 1970).

Perhaps we are led to conclude that David Korten’s view of economics is a consequence of his open-mindedness: his innate ability to see changes for what they are, as they take place. If this is the case then he is liberated: he deals with fresh facts untrammelled by the economics of dogma.   

David Korten

References

Korten, D. (2011). Capitalism and the Common Good. USA: Living Economies Forum. Available at <http://livingeconomiesforum.org/From-Main-Street-to-Wall-Street> [Accessed December 2012].

Foucault, M. (1970). The Order of Things: An Archaeology of the Human Sciences. London: Routledge.

Sustainable Business Model: Recognising the Relations

A first step in developing a sustainable business model is being able to see business for what it is. If we conceive of a business in monetary terms - as monetary accounting and finance does - then we fail to recognise the rich set of non-monetary relations that are essential to maintaining a business.

In the past when businesses were conceived in only monetary terms and their success was measured crudely as extra money created, business managers and owners could become systematically blinded to the social and environmental harm their businesses caused. Back in 19th century Victorian England when the country was being industrialised, the negative social impact of business was so bad that Karl Marx dedicated his life to fight against business, the capitalists as he named them. Marx of course developed a political ideology to which China still adheres.

In our own times, businesses that do not recognise their social, environmental and ecological impacts are a major cause of unsustainable development. This is a well known fact. There are many initiatives that try and make businesses formally recognise more of the relations upon which their (and our) long-term survival depends - whether the managers and owners see the relations or not. These initiatives include: the Global Reporting Initiative, Environmental Management Accounting,  the UN Global Compact 2010-2012, KPMG Sustainability Reporting Guidelines, SustainAbility 2008 Guidelines and the growing number of sectoral reporting schemes in such as Mining and Metals, Food Processing, NGOs, Airports, Apparel & Footwear, Construction & Real Estate, Events, Logistics & Transportation, Media, Oils & Gas, and Telecommunications.

This approach is to be admired since it marks a potential sea-change in the way we assess and value business performance. However this approach does not get to the root cause of the problem. It does not provide an alternative conception of what business relations really are: instead this approach attempts to take the traditional narrow monetary concept of a business and add-on other relations. This creates many problems among which the question of boundaries is paramount.

If we do not provide a fresh core-concept of what a business really is and attempt to advance sustainability by reporting alone, then we loose sight of what the business boundaries are. This is an inevitable consequence which is analogous to trying to alter the direction airplanes take by looking at and reporting on their slipstreams.

What are the boundaries of business sustainability reporting?
(Van Wensen et al. 2011, p. 108)

Instead of “chasing tails” and trying to make the world more sustainable with reports alone, we can redefine a business at its core. We can rethink what we now know about business activity - and add back those relations that were not recognised in businesses 200 hundred years ago when their foundations were laid. We can now recognise that a business, any business, is part of complex social, environmental and ecological relations as well as economic; and we can redesign a business so that it does - as a matter of routine - add value to all these relations.

Reference

Van Wensen, K., Broer, W., Klein, J., and Knopf, J. (2011). “The State of play in Sustainability Reporting in the European Union.” CREM B.V. and Adelphi Consult., Brussels: European Union.

We are not like animals – unfortunately!

Being Primal means that we acknowledge our shared ancestry with life on this planet – many thanks to Charles Darwin’s Theory of Evolution. But being Primal means then that we acknowledge our shared characteristics with other life on this planet:

“Primates matter. I don’t need to give you justifications describing their economic value or role in ecosystem services (although let’s not underestimate their importance as seed dispersers in tropical forests). Primates share so many of our characteristics – we see ourselves reflected in their gestures their facial expressions, their social interactions and the way they nurture their young. Primates hold a mirror up to the human race and that alone should be enough to justify our working to avoid their extinction.”

                Dr Abigail Entwhistle in “Relative Importance”, Fauna&Flora, 15, June 2012, p.4.

Primates are our closest relatives – and we are killing them off. We are killing not just the occasional bad or unlucky individual but we are killing them all. Imagine an individual from one particular species - Homo sapiens – killing all his or her relatives. That would be front-page news indeed and cries of shame would echo around the world. But as we kill off our closest relatives in nature, there is little outrage, few headlines, very few voices calling for justice to be done, no powerful police teams tackling this odious crime…. Why not?

“Primates are facing a crisis. This has been the case for the last 50 years at least, and the threats have not abated.”

                Ibid,. p. 5.

It is of course mankind who is killing its own closest relatives, the primates.

Mankind’s sense of justice and injustice is at times so self-absorbed, so self-reflecting and so human-self-privileging that it is classifiable as a kind of mental illness. Teenagers can sometimes be self-absorbed like this. In their struggle to find themselves in an adult world, teenagers can be too aware of their own pressing insights, limitations and predicaments and the demands of their own immediate situations that they often cannot see or relate to the plights of others – notably their parents. Of course not all teenagers are like this and there are many examples of “mature” teenagers who respect and work with their relations to the world outside of their own small selves.

Parents, schools and colleges are very skilled in helping young people discover their relations with the wider world that has created and nurtured them and which holds the key to their sustainable future. In a very real, everyday-living-sense, these wider relations include those that embed us and enable us to flourish – or wither - in the wider natural world.

If we linger a while with the idea of teenagers finding their way out of personal limitations and self-absorption, we can build a better understanding of one cause of mankind’s impact upon nature. Imagine if on a higher, more complex level, mankind is like a teenager – locked in an understanding that is far too self-absorbed and self-reflecting. Indeed if we look at one of – if not THE – controlling influences on mankind’s development, neo-classical economics and free-market ideology, then this teenage self-referencing and self-absorption is all too apparent.

The whole sophisticated, magnificent, influential and exceedingly powerful edifice that has created global corporations, financial institutions and free-markets that handle billions of dollars daily – is built upon rational choice theory – it is a system conceived by man, for man, in the service of man!!

The grown-up, mature, responsible world occupied by too many business leaders, financiers and politicians world-wide is at heart something akin to the same kind of self-absorbed, self-reflecting and self-privileging that it is at best a teenager trait; at worst a kind of mental illness. How else do you explain the fact that multi-millionaires who have far more money than they could possibly spend in several lifetimes dedicate themselves to making even more money – and not enjoying life with all their relations, human and non-human?

Baby orang-outang at Sepilok Orang-outang Rehabilitation Centre, Borneo, Malaysia

In 1967, Desmond Morris’s book The Naked Ape: A Zoologist's Study of the Human Animal (Hardback: ISBN 0-07-043174-4; Reprint: ISBN 0-385-33430-3) caused a sensation. It was sensational stuff to compare mankind with apes and to argue that we are so intimately related.

Unfortunately this sensational news still has still not had the impact it should in some very major business, economic, financial and political circles. Too many leaders, first movers, developers and their followers still behave like teenagers – locked within the boundaries of their far-too-small-worlds of their own making (more accurately locked within logical belief systems – see the ISD book).

This is why we are killing nature on an industrial scale – this is why we are not unfortunately like those animals who have learned over aeons to live alongside each other.

China and the Primal Episteme

Chinese accounting students who wanted to learn how accountants in the West  deal with accounting for social, environmental and sustainable development aspects of company performance had a shock when they attended Frank Birkin's lecture at Jinan University, Guangzhou, on Saturday 27th. October 2012. Instead of showing them how to do it, Frank showed them how scientific knowledge of the world now indicates that ancient Chinese ways of thinking provide a better foundation for social, environmental and sustainable development accounting than does neo-classical economics and free market idealism.

It is strange that educated Chinese people are not aware just how important their cultural and philosophical inheritance is to the world as a whole. Prof Rob Gray had set the scene by challenging Western notions of what accounting ought to be and this opened minds to the possibility that accounting could be very different - not just a servant to capitalism and financial markets. With the possibility of different forms of accounting established in their minds, these young Chinese accounting students were only too pleased to learn from Frank that they - the Chinese people - could develop their own, more harmonious and sustainable forms of accounting for China ... and for the world.

A slide from Frank's presentation in Jinan University, Guangzhou.

Please email Frank if you would like to learn more about how ancient Chinese culture and Philosophy can help to make the world a better place. You may also enquire about his itineraries in the near future to see if he could make a presentation at your university or college.