When the numbers don’t add up

First published on Market Mogul – December 10

Without mathematics, there’s nothing you can do.

Everything around you is mathematics.

Everything around you is numbers.

Shakuntala Devi (1929-2013)


The worlds of business, finance, investment and accounting are governed by numbers.  Business and investment cases, investment models and algorithms, accounting standards and conventions, they’re all about numbers. 

But we know that life isn’t like that.   Net Present Value and Discounted Cashflow, Return on Capital and Price:Earnings Ratios, Total Shareholder Return and Earnings Per Share are not the whole story.  In fact, they’re not even a majority of the story.

CEOs know that.  Analysts know that.  Even CFOs know that.  Those accountants who have escaped the audit team for more lucrative management consulting definitely know that.  One hundred years of management theory and practice tell us that there’s more to value than just the things you can count.

And therein lies the problem.  If you can’t count it, you can’t value it.  And, as Peter Drucker tells us, you can’t manage it.  And you certainly can’t (get CEOs to) forecast it.   But it’s still there; the 80% of market value beyond book value that people are still willing to base their trades on.  It’s not intangible, it’s someone else’s pension or life savings.  Or some Gulf potentate’s oil revenues. 

But hey, haven’t we heard all this before.  Aren’t people making a serious living showing others how to put numbers on things you can’t count?   Don’t we have strategy maps and balanced scorecards and value chains and shared value?  Well yes, but in the world of business and finance schizophrenia, those things operate in parallel to the real decision making.   Cash is king.  Until human capital investment or customer perception or myriad other factors can be given a positive NPV within a 3 year timeframe, they’re still out of the ball game.

Which is why the real challenges for all those who want to value the non-financial or intangible are not in Paris this week. They are probably being done a disservice by the tree-huggers seeking to save the world from climate change.  They don’t need Al Gore and friends to change the regulatory environment so we can forget trying to make an investment case out of global warming.  Even 100% certainty of 100% oblivion within 100 years will still have a pretty small impact on the next 5 year’s cashflow when discounted back.

The fact is there are much bigger and more immediate issues we need to count and better manage.  Most of them don’t even need internalising.  We all accept, for example, that engaged employees and customer advocates are critical to delivering the numbers underpinning current target prices.   And we are probably pretty close to be able to quantify the impact of those two factors on corporate earnings.  But do we know what drives changes in their metrics?  And do we know what other factors are out there we can confidently value and predict?  Shouldn’t we?  

Well, there are people trying to capture the key factors and their metrics and monetise them so everyone can build into those algorithms and NPV calculations.  The accountants are sharpening their claws as they embrace the prospect of integrated reporting.  People are starting to see a new realm for Alternative Beta.  Some profess they’ll deliver Alpha.  Maybe even the value investors will finally climb ahead of the growth boys if we can get this right.

And isn’t that all good?  An end to volatility as the markets stop fooling around with other people’s money and have to justify their decisions simply on the basis they can?  That must be worth a few dollars, right?   Please form an orderly queue with your resumes.    

valuing non-financial performance

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