A friend committed to see the world pivot to a new system explained that he's framed two questions to try to make sense of the world's climate and social chaos:
As intangible experts, we would say that a system is the expression of a set of beliefs. Yes, any system can be manifested in tangible form (an Amazon warehouse for example) but the design is merely an expression of the designer's beliefs, of what the system is to achieve and how it will do so optimally.
Imagine then that 2020's capitalist system represents a set of beliefs. This system decides that tax is a choice and that humans are commodities to be paid below the living wage. It decides that blowing up 46,000 year old ancient caves in the Jukkan Gorge in search of iron ore is acceptable, and when found out, it believes that taking away executive bonuses is the right response, and when this is questioned, decides to dismiss the CEO whilst giving him £32m in shares as a ‘thank you’.
Try to picture, this system as like Set 2 at school. In Set 1, all children behave well, have the best teacher and encourage each other to work hard. In Set 3, the general behaviours are disruptive and hard work is discouraged. But in Set 2, some of the children are working very hard to get into Set 1, whereas some of the children are working equally hard to get into Set 3 by disrupting the class.
But in this Set 2, the worst behaved children systematically disrupt the class without consequences and are even rewarded (aggressive tax avoidance increases EPS and incentives, pillaging the Planet is an externality, blowing up a 46,000 year old burial ground gets you £32m in shares as a ‘golden goodbye’), whereas the best behaved children receive no reward (responsible tax or a transition to Climate Neutral are costs on the Income Statement) and can often be punitively punished for their first mistake (missing quarterly guidance will reduce share price by 40% or more even if you're systematically well-behaved).
In this Set 2, the system beliefs are quite literally upside down. And as beliefs flow directly into decisions, then those beliefs dictate the outcome of many billions of decisions every day.
At Rethinking Capital, we believe that the problem is that the economy has fundamentally changed (from industrial to intangible) but that economic theory and all of its derivative systems have yet to adapt. Two similar transitions have occurred in history and each time, the same pattern repeats-the economy changes first and its rules, systems and norms only later adapt. Within 'derivative systems' we include accounting.
The current practice of accounting does not capitalise intangible assets and writes them off as an expense. Equally, the practice of accounting also fails to properly recognise intangible liabilities, including climate risk or other social obligations. As such, the Balance Sheet, which used to be a primary guide to decision making, has lost its way and relevance. Attention then switches to the Income Statement and the short term.
Our mission then is to restore (or re-store) the Balance Sheet for decision-making. We aim to do so by creating the manual that explains how to capitalise and fair value all intangible assets and how to properly recognise and fair value all material intangible liabilities.
You may notice if reading this back that I've deliberately used the words 'the practice of accounting' because the frameworks apply existing GAAP and update double-entry bookkeeping. They are also informed by existing International Accounting Standards.
Having re-stored the Balance Sheet, we aim that good governance will require it to be restored in decision-making. Responsible tax and other decisions to do the right thing will be rewarded and aggressive tax avoidance will have consequences, including for decision-makers.
Will it reset the system beliefs? Will sustainable decision-making become business as usual, as A4S describe the ambition? If we believe in human nature, then maybe, just maybe, it could.
But it won't for everyone. As Alfred (Michael Caine) says to Batman (Christian Bale) in The Dark Knight:
'Some men aren’t looking for anything logical, like money. They can't be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.'
And for them there have to be consequences.
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The economy has clearly changed. Intangibles dominate the global economy but accounting practice hasn’t kept up. As a result financial statements don’t show what is actually creating value (intangible assets) or those things that could lose value (intangible liabilities, such as climate risk).
Ultimately the fact that there is a gender pay gap is the result of decisions made, no doubt by men, based on a belief that motherhood isn’t as valuable as earnings for the company. And balancing gender pay (over time) is similarly a decision, able to be made, by men, who are choosing not to make it. Call it a conscious decision not to make a decision. Now that the gender gap has been exposed, how can the decision to balance it be enabled?