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File: TVM-MILE-webinar-150616 Peter Burgess (c) All rights reserved

How to Manage for Best Triple Bottom Line Performance

MULTI DIMENSION IMPACT ACCOUNTING

File: TVM-MILE-webinar-150616 Peter Burgess (c) All rights reserved

How to Manage for Best Triple Bottom Line Performance


WORK-IN-PROGRESS.SLIDESET STILL IN DEVELOPMENT.UPDATES WILL BE POSTED OVER THE NEXT SEVERAL WEEKS


For best possible performance, EVERYTHING must be taken into consideration.


That is a significant change from the conventional wisdom of prevailing BEST PRACTICE that optimizes for money profit performance in the company


It is a fallacy that if GDP growth is good, corporate profits are good, and stock markets are good, then everything is good.


It is also false to expect high performance in 'my silo' to result in high performance throughout the complex system that is the modern company and the modern society.


Who am I? Who is Peter Burgess?


I am in the 4th quarter of my life the progress of science and technology in my lifetime has been quite amazing and much else in the world has changed.


1st quarter I grew up in the UK and ended up with a formal training in engineering and economics from Cambridge, and qualified as a Chartered Accountant in London with Cooper Brothers (now the PriceWaterhouseCoopers firm)


2nd quarter A fast track career in corporate management in the USA engineering, construction, iron and steel, pulp and paper, consumer products, electronic technology, marine fisheries.

It was all about improving profitability, and I was good at it!


3rd quarter Independent consulting, mainly international work with both the private sector and institutions like the World Bank, the IFC and many UN agencies. This involved work at the highest levels of Government as well as with people in crisis refugees, drought victims, etc.


4th quarter Still independent but less traveling and now with a focus on rethinking the metrics of management so that the fantastic potential of modern technology can be harnessed to enable faster PROGRESS and much better PERFORMANCE of the very complex global SOCIO-ENVIRO-ECONOMIC system.


So what is the state of play in the 1st quarter of this century?

A lot that is amazingly good:Fantastic technological progress;

Considerable growth of GDP and financial wealth;

Substantial reduction in global poverty and poverty related issues;

Significant improvements in health and education.


But also many things that should be a whole lot better:Social issues of all sorts are emergingand not being addressed;Increasing wealth and income disparities;

Increasing violence, much of it highly organized;

More and more migration and refugee movements;

Disaffection with the political establishment;

Disaffection with the corporate establishment.


Also Environmental issues of all sorts that areemerging and not being addressed;Greenhouse Gas (GHG) emissions and the relatedclimate change;

Land degradation and reduction in ecosystemservice capacity;

Water shortages and water quality degradation;

Air pollution other than GHGs;

Loss of bio-diversity;


Most of our modern quality of life has come about because of amazing technological progress and productivity improvement in the corporate sector.


The future depends more than anything else on decisions that are going to be made by leaders in the corporate sector.

Will they make the right decisions?


The idea of the TRIPLE BOTTOM LINE (TBL)* was a step towards having the corporate world think about PEOPLE and PLANET as well as PROFIT.

* John Elkington is credited with originating thisidea in the 1990s.


The idea of the TRIPLE BOTTOM LINE (TBL) is a beginning and not an end.


TBL (or 3BL) may even be something of a distraction. TBL is simply more information that has a focus on the performance of the organization.

The bigger need is for the performance of the organization to be put in context with the many other stakeholders in the global socio-enviro-economic system.


It should be noted that there is a lot of work being done to improve the measurement and management of IMPACT.

Recently Kering published information abouttheir work on an environmental profit and lossaccount (EP&L). Good work, but too slow andtoo expensive

Reporting initiatives like the GRI (G4) arespreading. There are also the IR initiative(Integrated Reporting), SASB, SROI and manyothers, not to mention a variety of initiativesaround specific issues like carbon footprint.


Most of the better known initiatives are not making much use of the old established double entry feature of conventional accounting which clearly differentiates between STATE and FLOW.


AND also makes it possible to get a lot more useful information from less data


These 3 slides explain the concept of STATE and FLOW

or in accounting terms, the BALANCE SHEET / PROFIT AND LOSS relationship


STEADY STATE


POSITIVE PROGRESS


DETERIORATION OF STATE

These reflect

Steady state;

Positive progress; and

Deterioration of state


No information about the activities is needed in order to understand PROGRESS

only information about changes in STATE


State, Progress and PerformanceState is the Balance Sheet of the entity at amoment in time;

Progress is measured by comparing BalanceSheet changes between the beginning and theend of the period;

Performance is a measurement that relatesProgress to the resources consumed.



EFFICIENCY AND EFFECTIVENESS

Cost, Price and ValueClarity about what is cost and what is price isvery important;

A buy/sell transaction takes place at a price;

The buy price becomes the buyer's cost;

There is a lot of data about price;

There is very little accessible data about cost;

Value is a very important idea, but quantified data about value are missing;

Data about cost, price and value ignoreexternalities (impact on people and planet)



Money as a measure

Money is fatally flawed as a universal way of measuring progress and performance in the totality of the socio-enviro-economic system.

Money value is derived from exchange transactions the market which gives a result based on supply and demand.

It is a 'result' and not a 'measure'.


In engineering and science, measures are strictly defined and are constant no matter what changes in the surrounding system.

A metre is always a metre.

A kilogram is always a kilogram.

Not so money


Nevertheless ...

Money and conventional money based double entry accounting has been a very effective tool for managing performance in the business setting going back a very long time and today at the core of ALL corporate MIS (management information systems).


Standard costs

Conventional cost accounting often uses a framework of standard costs as a powerful management tool.

The standard is the norm. Variations from the standard are identified and used to implement corrective action.


Summaries AND Drill-Down

Conventional money based accounting enables financial reporting in a simple, understandable way at a summary level.

and on top of the same data enables 'drill-down' to the detail whether it be business unit, department, process or product.


Measurement

Money is universally used to measure business performance as well as wealth and values in capital markets good!

But what measure to use for everything that affects human life and quality of life?

What measure to use to reflect impact on the environment the natural systems upon which everything depends.


Peter Drucker

You manage what you measure


Limited scope

Financial reporting is strictly limited to the financial progress and performance of the reporting entity.

What happens beyond the reporting boundary has no reporting effect on the entity. None.

This is the system and it is inadequate for the modern world where externalities are of consequence.


Ignoring Externalities

The rule in conventional accounting is to ignore externalities.

If there is no money transaction there is nothing which is patently absurd in a world where natural resources are being depleted and the environment degraded by very large scale economic activities.

Not to mention the huge impact business has on society at large people.


But what measure to use for everything that affects human life and quality of life?

What measure to use to reflect impact on the environment the natural systems upon which everything depends including:The Carbon Cycle;

The Water Cycle;

Land use (including ecosystem services);

Various Nutrient Cycles.


Standards for Cost and Value

Conventional cost accounting often uses a framework of standard costs as a management tool.

The standard is the norm. Variations from the standard are identified and used to implement corrective action.

Impact accounting can be based on a system of standard values similar to standard costs.


QuantificationMeasuring facts is a vital step and this mean putting numbers on measurements. This is essential to enable good decision making.Money is used to measure profit and much to do withfinancial capital.

A measure is needed for everything to do with human life and quality of life human capital

Other measures are needed for:The Carbon Cycle;

The Water Cycle;

Land use (including ecosystem services);

Various Nutrient Cycles.


The next slide shows:

Niger Delta oil pollution this pollution from oil industry activities has ruined the lives of most of the indigenous people of the area, wrecked the local fishing resources but at NO COST to the oil companies which report high profits and high stock price valuations.

Externalities MUST be brought into account.



SunSunBOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunEOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunPROCESSOIL POLLUTION IN THE NIGER DELTA

The next graphic slide shows:

Beginning of period state BOP

and

End of period state EOP


Also, it shows ...

The makeup of STATE as follows:

Financial Capital

Human Capital

Man Built Capital

Natural Capital and

Sun

The activities between BOP and EOP change ALL these components of state.



SunSunBOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunEOPFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSun

And the next slide shows ...

A typical P&L account representing the activities that are taking place in the period:



SunFINANCIAL P&L ACCOUNTFinancial Accounts describe Economic Activity

REVENUESProducts Sold X PriceProducts Bought X PriceBOPEOPEnergy Bought X PriceEmployee BenefitsEmployee PayrollOther expendituresAsset use costsDepreciationFinancial expensesPro-good expendituresTaxationPROFITSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunCOSTS


SunBOPEOPSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunFINANCIAL ACCOUNTSDESCRIBE ECONOMICACTIVITY IN FINANCIALOR MONEY TERMSWHILE COMPLETELYIGNORING IMPACT ON EVERYTHING ELSE

Next 2 slides

The first slide is a simplified representation of the State Flow State idea for ALL elements of the Socio-Enviro-Economic System

The second slide shows what the conventionalmoney metrics measure just a tiny part ofeverything that matters.


* BOP EOP Beginning and End of Period


STATE - BOPSTATE - EOPPERIOD ACTIVITES


STATE - BOPSTATE - EOPPERIOD ACTIVITES

The next slides show how the data architecture has to work in order for IMPACT to be computed in a rigorous and logical way



SunFINANCIAL P&L ACCOUNTFinancial Accounts describe Economic Activity

REVENUESProducts Sold X PriceProducts Bought X PriceBOPEOPEnergy Bought X PriceEmployee BenefitsEmployee PayrollOther expendituresAsset use costsDepreciationFinancial expensesPro-good expendituresTaxationPROFITSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunCOSTS


SunADD positive impact not accounted for

BOPEOPREVENUESProducts Sold X PriceVALUE to buyerEqualsHUMAN CAPITAL ADDWages and benefitsWhat value to employee?Pro-good expendituresWhat value to society?TaxationWhat value to society?POSITIVE IMPACT NOTACCOUNTEDFORFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunFINANCIAL P&L ACCOUNTREVENUESProducts Sold X PriceProducts Bought X PriceEnergy Bought X PriceEmployee BenefitsEmployee PayrollOther expendituresAsset use costsDepreciationFinancial expensesPro-good expendituresTaxationPROFITCOSTS


SunDEDUCT negative impact not accounted for

BOPEOPFor products andenergy bought and this processFree use of thecommons andpublic services& infrastructureDegradationof landWater scarcityand degradationAir pollution:Impact on peopleAir pollution:Impact on climateAir pollution:Impact on peopleSolid wasteResourcedepletionEnvironmental DegradationNegativeimpactFile: MDIA-Framework-004-150411-WIP.odp Peter Burgess (c) All rights reserved

FinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunFINANCIAL P&L ACCOUNTREVENUESProducts Sold X PriceProducts Bought X PriceEnergy Bought X PriceEmployee BenefitsEmployee PayrollOther expendituresAsset use costsDepreciationFinancial expensesPro-good expendituresTaxationPROFITCOSTS


SunACCOUNTING FOR EVERYTHING

BOPEOPREVENUESProducts Sold X PriceVALUE to buyerEqualsHUMAN CAPITAL ADDWages and benefitsWhat value to employee?Pro-good expendituresWhat value to society?TaxationWhat value to society?For products andenergy bought and this processFree use of thecommons andpublic services& infrastructureDegradationof landWater scarcityand degradationAir pollution:Impact on peopleAir pollution:Impact on climateAir pollution:Impact on peopleSolid wasteResourcedepletionEnvironmental DegradationPOSITIVE IMPACT NOTACCOUNTEDFORNegativeimpactFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunFINANCIAL P&L ACCOUNTREVENUESProducts Sold X PriceProducts Bought X PriceEnergy Bought X PriceEmployee BenefitsEmployee PayrollOther expendituresAsset use costsDepreciationFinancial expensesPro-good expendituresTaxationPROFITCOSTS

The next slide shows how the operations of a process:(1) through the money P&L report impact onthe money balance sheet of the operation;and,(2) through the IMPACT accounts report on the impact the operation is having onsociety and the environment.



SunBOPEOPSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSun

Financial Accounts describe Financial Impact

Financial CostsFinancial ProfitFinancial RevenuesFinancialBalance Sheet

BOPFinancialBalance Sheet

EOPImpact Accounts reflect Externalities

Balance SheetChangesImpact on InstitutionsImpact on PeopleImpact on SocietyImpact on PhysicalImpact on KnowledgeImpact on ResourcesImpact on EnvironmentImpact on EcoSystemBalance SheetChangesBalance SheetChangesBalance SheetChanges


SunBOPEOPSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSunSunSunFinancialCapitalHumanCapital Man BuiltCapitalNaturalCapitalSun

Financial Accounts describe Financial Impact

Financial CostsFinancial ProfitFinancial RevenuesFinancialBalance Sheet

BOPFinancialBalance Sheet

EOPImpact Accounts reflect Externalities

Balance SheetChangesImpact on InstitutionsImpact on PeopleImpact on SocietyImpact on PhysicalImpact on KnowledgeImpact on ResourcesImpact on EnvironmentImpact on EcoSystemBalance SheetChangesBalance SheetChangesBalance SheetChanges

SUPPLY CHAIN


SUPPLY CHAIN

The MONEY dimension of the supply chain isroutine; however

The IMPACT dimensions of the supply chain are rarely (so far, never) implemented in arigorous manner.



PRODUCT the SUPPLY CHAIN

Zero to startCosts this stageProfit this stagePrice this stageZero to startCosts this stageProfit this stagePrice Stage 1FINANCIAL ACCOUNTS FOR EACH STEP OF THE SUPPLY CHAINCost = Price stage 1Costs Stage 2Profit Stage 2

Cum Costs Cum ProfitPrice Stage 2Cost = Price stage 2Costs Stage 3Profit Stage 3




Cum Costs Cum ProfitPrice Stage 5ETC...


MBCNaturalCapitalHumanCapitalPRODUCT the SUPPLY CHAIN

ADJUSTMENTS TO REFLECT IMPACT (EXTERNALITIES)Zero to startCosts this stageProfit this stagePrice this stageZero to startCosts this stageProfit this stagePrice Stage 1FINANCIAL ACCOUNTS EACH STEP OF THE SUPPLY CHAINCost = Price stage 1Costs Stage 2Profit Stage 2

ImpactStage 1ImpactStage 1ImpactStage 1

Cum Costs Cum ProfitPrice Stage 2ImpactStage 2ImpactStage 2ImpactStage 2Cum ImpactCum ImpactCum ImpactCost = Price stage 2Costs Stage 3Profit Stage 3

Cum Costs Cum ProfitPrice Stage 3ImpactStage 3ImpactStage 3ImpactStage 3Cum ImpactCum ImpactCum ImpactFinancialDimension

COMPANY


To manage for profit AND impact we need to apply this framework for analysis in these ways:

for the ORGANIZATION as a whole;

for discrete UNITS of the ORGANIZATION;

for PROCESSES used in transformation;

for PRODUCTS through their life cycle;

for PEOPLE and their quality of life;

for PLACE and how place impacts Human Capitaland interacts with Natural Capital.


It is optimizing for ALL of these things that will result in the best possible socio-enviro-economic system performance and the best Triple Bottom Line results.


Companies, corporate organizations, are the most efficient way to implement transformation.

Applied technology, systems thinking and cost accounting are very highly developed and the results amazing.


In a typical business setting:Profits are maximized.

Company valuations are high.

Products are abundant.

Society has more employment but alsomore unemployment.

Environment is being degraded andthere is resource depletion.


Everything a company does has an impact not only on the profit of the enterprise but also on society (people) and the natural world / environment (planet)


Material Costs

Money profit accounting material costs are a cost to the business and earnings are reduced by high material costs. Supply chain and outsourcing reduce costs and improve profit.

Impact accounting The impacts as materials flow through the supply chain must be brought into account as the material is transformed, and then carried forward in the new products.


Energy Costs

Money profit accounting energy costs are a cost to the business and earnings are reduced by high energy costs.

Impact accounting There are very substantial environmental costs associated with energy from carbon based fuels. There is also the cost of resource depletion. Energy impacts in the supply chain should be accounted for.


Employees and PayrollMoney profit accounting payroll is a cost to the business and earnings are reduced by higher payroll and benefit costs. Higher wages might mean higher productivity and be good for profit.

Impact accounting There is a direct benefit to the employees and their families with higher wages, but in addition there is a multiplier effect in the community as this money is spent.


Advertising and Public RelationsMoney profit accounting these costs ae justified because successful advertising and PR increases revenues and profit.

Impact accounting With impact accounting, the indirect impact of increased sales on society and the environment may be brought in to account. For some people more is better. For the more wealthy the impact of more is almost totally related to more damage to environment.


Workplace conditionsMoney profit accounting low cost, low safety working conditions might result in short term profit maximization but the risks are high especially if the cost of reputational damage is included.

Impact accounting The impact of poor workplace conditions should be accounted for throughout the supply chain and brought into the trucost of the product.


Use of physical assets

Money profit accounting this is usually accounted for by a depreciation charge which reduces profit and provides for deterioration of the physical asset.

Impact accounting There is a not only the physical plant owned by the company but also the public infrastructure that is being used which should be brought into account.


Payment of taxesMoney profit accounting taxation reduces business earnings available to the owners.

Impact accounting There is a benefit to Institutional Capital (i.e. Government) because they have revenues to pay for government programs.


Pro-Good expenditures

Money profit accounting pro-good expenditures reduce business earnings available to owners. In many situations they are done to reduce taxes

Impact accounting There may be a reputational benefit that feeds back to the company. These expenditures can be of great benefit to individuals and society and should be brought into account.


Life Cycle Assessment for Profit

Many business initiatives are 'profitable'. Applying some of the concepts of life cycle assessment (LCA) to profit will clarify what profit is good for society and the environment and what profit is anti-social and doing damage to the environment.


LCA for Profit example:

The oil industry In Saudi Arabia is very profitable low cost oil and relatively high international prices.

The 'profit flow' has enabled expenditures that have built most everything in modern Saudi Arabia and funded important social initiatives like education.

A very positive LCA outcome


Another LCA for Profit example:

Addictive drugs are very profitable. There is a strong demand for the products of the illegal drug trade and profits are high.

Some of this 'profit flow' is used to ensure that addiction continues and to ensure that the authorities lose in their attempts to control and eliminate the trade.

A very negative LCA outcome


Product design

Money profit accounting Good product design can enable higher prices and reduce costs. This is good for profit.

Impact accounting Good product design can also reduce negative impact throughout the supply chain, use and post use waste chain.

This is important.


Process

Money profit accounting The process used in transformation is a determinant of cost and therefore has an impact on profit.

Impact accounting Good performance in processes enables lower impact on resource depletion and environmental degradation.

This is important.


Customer

Money profit accounting The customer buys product which creates revenue which is a component of profit. More sales made to customers the better

Impact accounting People need some goods to satisfy needs. Quality of life is not merely about more 'stuff'. Some customers are short of both money and the things they need, but many customers with money have excess stuff and are simply adding to WASTE


Informed customer in controlMoney profit accounting Advertising is used to inform the customer in a manner that is totally related to selling the company's products. The more the better. Good for profit.

Impact accounting When customers are well informed about products and the IMPACT that products have on their own quality of life and on everything else, it is customers that will be in control and make the difference.


PEOPLE


PEOPLE

In the end, progress and performance should be evaluated based on the impact economic activity has had on people (society) together with the long term impact on the environment (planet).


People

Money profit accounting There is money profit accounting for person. To a great extent money and wealth have become proxies for success.

Impact accounting With impact accounting for the person, there is more clarity about the performance of the person and their role in making society and the world a better place.


PLACE


PLACE

Everything happens in a place. Impact accounting has a special relevance in a place. The place is always there. Bad actors can be identified and held accountable. Trends can be observed over time.


Place

Money profit accounting There is no money profit accounting for place. There is merely an assumption that economic activity is good for the place, no matter what.

Impact accounting The place is the best way to organize impact accounting about everything. It is where the idea of PLANET has some reality. There can be accountability for all actors in the socio-enviro-economic system and impact on the environment observed.


Most governments around the world are short of money

There is a revenue problem with too low taxes, too many loopholes and simply failure to pay taxes.

There is also an expenditure problem with government performance extremely inefficient.


QUANTIFICATIONANDSTANDARD VALUES


Money

Money is an important metric but seriously flawed in many ways.

It is too entrenched to be changed very much in the short run but it must be complemented with other units of measure (UOM).


UOM for Life and Quality of Life

A key characteristic of this UOM must be that a life has value no matter who the person is.

It is too entrenched to be changed very much in the short run but it must be complemented with other units of measure (UOM).


Moving forward Request for collaboration

Money is part of a complex socio-enviro-economic system. While it works it does not work as well as it should, nor as well as it could. The work of MDIA is to enable this complex system to work better.

MDIA needs to be a team effort. Join in and help to make the world a better place. Please get in touch.

Peter Burgess [email protected]


Thank you ...

A big thank you to the Madinah Institute for Leadership and Entrepreneurship (MILE) for hosting this webinar.

Some links and contact information:

Peter Burgess [email protected]

Peter Burgess LinkedIn profilehttps://www.linkedin.com/in/peterburgess1

Link to TrueValueMetrics.org websitehttp://www.truevaluemetrics.org/

Link to navigation for MDIA slidesetshttp://www.truevaluemetrics.org/DBadmin/DBtxt001.php?vv1=list0200-Burgess-p3-Slidesets


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