Subtle and Gross
In the Blueprint for Corporate Sustainability Leadership released by United Nations Global Compact, “corporate sustainability is defined as a company’s delivery of long-term value in financial, social, environmental and ethical terms. It thus covers all principles and issue areas of the UN Global Compact.”
Ethics is subtler than the subtle, whereas financial terms are utterly gross. Corporate deals with gross elements and occasionally subtle ones, as in case of brand value. In his paper published in October 2001 WORKING PAPER NO. 01-15 WHAT IS THE US GROSS INVESTMENT IN INTANGIBLES? (AT LEAST) ONE TRILLION DOLLARS A YEAR!, Leonard I. Nakamura of Federal Reserve Bank of Philadelphia, states: “This paper, part of a project on the empirical importance of creative destruction, attempts a preliminary estimate of the US investment in intangible assets. I argue that the rate of investment in intangibles, and its economic value, accelerated significantly beginning around 1980. Currently, I estimate that US private gross investment in intangibles is at least $1 trillion. For historical reasons, much of this US investment in intangibles still remains uncounted. Both in US generally accepted accounting principles, and in US national income accounting dating at least back to Kuznets, investment in intangibles has been expensed, that is, treated as an intermediate input consumed in producing current output rather than as investment that produces a long-lived asset.”
To note: “Intangible Assets – at least $1 trillion – creative destruction – remains uncounted – consumed in producing current output – rather than long-lived assets.” Innovation is a subtle element, incubator that would grow to destroy inefficiency. As and when it becomes a gross element as an IPR and used within the organization then the capability enhancement between the old and the new is gentle and remains subtle, like an ERP implementation. In this case as Nakumara points out, it remains uncounted but the capability enhancement is visible. When it is used outside the organization such as during M&As it is very evident as a gross element, as in case of AOL takeover of TIME-Warner. In both cases it is treated as an intermediate input consumed in producing current output rather than as investment that produces a long-lived asset. Meaning every Intangible Asset in a Balance Sheet does not get promoted and join the heading – Fixed Assets. The fact is that collectively a trillion $ investment in intangibles remain – uncounted.
Why? Intangible Asset in its entirety is a subtle element and the moment it becomes gross it escapes the tag of an intangible asset with a name IPR or something similar. It remains uncounted because intangible asset which is subtle, gives a false impression of being gross. In a Balance Sheet, Intangible Asset is a square peg in a round hole. Because a subtle element can never merge into a gross element as it is yet to advance by several stages. But it is not the case of a gross element as it can be broken into several stages of evolution before it emerges as a gross substance. Meaning gross element can sit easily with a subtle element in a statement of group of subtle elements and it is not the other way as intangible asset is always uncomfortable within a Balance Sheet. This is mainly because of the nature of a Balance Sheet that accommodates only transactions whereas an idea however significant it could be, has no place inside a Balance Sheet. Not counting a trillion $ investment [2001], anybody’s guess as of now in 2011, means one is unable to track the investment – how much has been consumed in producing current output, how much traded out, how much sucked in the funds for unproductive speculative enterprises and how much remain as a long-lived asset. The limitations of the Balance Sheet are well known that can never accommodate an idea or a brand value and therefore there is a real case for creating a statement of only subtle elements with an appropriate measuring device so that these subtle elements do not remain uncounted but stand up , be identified and counted.
Applying this principle to Corporate Sustainability Leadership the 10 Principles of UNGC will remain subtle. As in case of technological innovations enhancing the productivity of the company, the 10 principles of UNGC are meant to enhance the capability and efficiency of the Corporate, but yet would remain subtle and therefore uncounted if one were to pursue it through the reporting system one is accustomed to. The difference becomes more pronounced if one looks at the Technological innovations that have direct relationship with the company whereas the 10 Principles have direct connotation of Social Responsibility outside the purview of Corporate Business Strategy. The intention of UNGC is no doubt the 10 Principles become part and parcel of Corporate Business Strategy but yet it will remain subtle and will embrace a wider areas of commitment from the company that are beyond the Business Strategy. These two are entirely on different wave lengths and therefore the treatment meted out to one is different from the other. Business Strategy in its focus is based on Fiscal Responsibility whereas the focus of 10 Principles of UN Global Compact is based on Ethical Responsibility. Fiscal Responsibility is accounted from gross to gross whereas Ethical Responsibility is seen from subtle to gross to a gradual evolution of knowledge which is the goal of ethics. This knowledge base would remain subtle but a qualitative assessment is needed for comparability between one company and another by capturing and counting the stages of evolution that are identical between one company and the other globally, of the 10 Principles of UNGC.
One that distinguishes most the ethical from fiscal responsibility is the emphasis on public participation. Sustainability is the emphasis on how public reviews the progress of ethics within the corporate walls. Ethics is not imposed upon the Corporate but a voluntary adoption of ethical standards adopted and carried through Corporate Governance. The 10 Principles of UNGC is a set of Business Ethics. Corporate Governance is the operating system that ensures the threshold values of the 10 Principles are respected and by public reporting the Corporate Social responsibility is discharged. This will not happen if Corporate publishes reports in isolation for the one that connects the Corporate Sustainability Leadership is one significant factor – Participation of Society as in Article 13 of UNCAC. The 10 principles of UNGC must contain the provisions for Article 13 factored into Corporate Sustainability Leadership within. This is the fulcrum of balancing the efforts of Corporate towards the cause i.e. the society. That is the causality of CSR that Aman SIngh brought out in the 11 challenges. This is very fundamental to the sustainability.
Sustainability is a term related to ethical responsibility not fiscal. It may or may not be feasible to maintain the ethical standards in strange situations in strange countries, maybe China or India, Africa or South America or Middle East but sustaining with the ethical standards of the company by the 10 Principles of UNGC becomes a challenge by itself. One cannot do business in some countries without bending the rules crossing the threshold values. Can the company sustain with its ethical rules strictly? During Gulf Oil and Lockheed scandal, when Arthur Young was appointed for a peer review of the Auditing Standards of Peat Marwick, IBM came with the Letters to the Editor of TIME stating that IBM did not believe as a policy to bribe under any circumstances. IBM did wind up their shop in India completely lock, stock & barrel around the same time, a stroke of genius on Corporate Social Responsibility that both IBM & India came out with a win-win situation by getting rid of the junk card readers for a technological leap forward. Today IBM is able to sustain its principles and that is what the public understands as Corporate Sustainability Leadership. That’s what the public demands.
As in case of Intangible Asset being a square peg in a round hole Corporate Social Responsibility displayed through the prism of financial terms in a Balance Sheet will remain uncounted and soulless. Preparation of a Balance Sheet is accounting because it has only gross elements. Whereas Corporate Social Responsibility is of subtle elements that Corporate once decides to go in for Sustainability Leadership the process will be measured not by accounting but by Accountability. The Accountability of Corporate Social Responsibility is by Article 10 Public Reporting that would be a non-starter without Article 13 Participation of Society. All results that are being reported would remain subtle because only a gross element meets its end by the task accomplishment whereas capability or efficiency never disappears that would ever remain subtle. Corporate Social Responsibility could never merge into Corporate profits but Corporate Operating efficiency can slide into Corporate Social Responsibility capability that are comparable between one and the other. Both operating efficiency of the company as well its Social Responsibility are NOT to be treated as an intermediate input consumed in producing current output but as investment that produces a long-lived asset.“
Let Corporate Sustainability Leadership remain in subtle form with an assurance 1. it can be counted, 2. It can be compared and 3. It can be merged – Globally.
If Corporate Sustainability Leadership is measured in a gross form the October 2020 research findings will state: “Currently, I estimate that US private gross investment in Corporate Sustainability Leadership is at least $3 trillion. For historical reasons, much of this US investment in Sustainability still remains uncounted. Both in US generally accepted accounting principles, IFRS and in US national income accounting dating at least back to Kuznets, investment in Sustainability has been expensed, that is, treated as an intermediate input consumed in producing current output rather than as investment that produces a long-lived asset.”
Corporate efforts must lead to knowledge which is the goal of ethics.
Measuring and counting Corporate Sustainability Leadership is the essence of Global Compact that Companies shall follow the principles enunciated in Angel’s Advocate Measuring National Grid of Governance http://wp.me/p18MVb-6h and may download my first book Inactivity Based Cost Management [see the link to your left] for basis of measuring and counting before my next release on ‘Measuring Corporate Sustainability Leadership’ that I am currently working on.
Thank you.
Jayaraman Rajah Iyer
Author of Inactivity Based Cost Management
Nice! I always find intangible assets of much importance. That is my basic reason for disagreement with Marshal’s Utility Theory, where he attempts to quantify the qualitative variables. I always wanted Economists to remain Social Scientists and not to turn Mathematicians. We have enough of Mathematics Graduates and when required can hire them to solve equation at which they expertise. I still request the Polity experts to request economists to remain economists. Nice Post.
Saurabh, India
Thank you. Like Large Hadron Collider World must create a major 100 kms underground tunnel surrounding New Yok and deposit all Economists to do their experiments and not to come out of it until World Economy comes out of the abyss.