In her final article at the Financial Times, business editor Sarah Gordon summarises what she learned over 20 years and concludes, “Many businesses are badly run, but business is not bad”. It is a pretty damning conclusion, supported by the large list of examples she offers. Her conclusion does not surprise me. In my past writings I have often referred to the McKinsey & Company international research survey of directors of large companies. It found that only 22 per cent thought the boards they sat on had a full understanding of how the firm creates value, and only 16 per cent thought they had a good understanding of the dynamics of the industry the firm operates in. But every institutional investor and analyst I have spoken to tells me these numbers, whist shocking, are very optimistic. They suggest the true percentages are more likely to be in the low single digits in both cases.

It was the McKinsey research that led me to question whether firms are being managed to create real value. I’m not the first to doubt that they are. Roger Martin in his book Fixing the Game, suggests they are being run to create stock market value in what he has called the expectations economy. And my enquiries tend to confirm this is often the case. The problem is not only with those running the firm, who don’t know what real-world value they create, for whom they create it, or how they create it – and cannot, therefore, account and be held properly accountable for the organisation’s performance. The problem is also with so-called ‘investors’ who do not care. Their primary interest instead being to be able to predict movements in stock price.

“Economics must address the hubris… that manifests itself in the pretence of being scientific in the same sense as the pure sciences… It must accept that it is, and can only ever be, a social science. And it can learn much from the other social sciences.”

Most do not even understand the real value drives of the businesses they are investing in, and do not care. One senior policy advisor for a body representing many of the world’s largest institutional investors told me the percentage of people who could explain the real drivers of value in the businesses they ‘invest’ in is “probably around 25 per cent”, and the percentage of those who care about such indicators is certainly in the low single digits. As for their opinions about the capabilities of analysts, upon whom many investors base their decisions, the opinion of experts I have spoken to is also scathing. And this remains the picture, long after the 2007/8 crisis and the publication of the Kay Review.

To address these issues, I have been making the case for valueism, which I refer to as the next evolution of capitalism. The aim is to get business focused on the creation of real value once again. And I define value broadly, not only on monetary terms. The terms I use to define value relate to the generation of lasting, widely shared prosperity, where prosperity means well-being and human flourishing. It is a human-centred approach that would help restore trust in business and address the many problems Gordon highlights in her article.

Valueism is starting to be taken very seriously by people in businesses, and by investors, professional bodies, economists, journalists and academics. My colleagues and I have argued it should be the driver of innovation strategies in areas from health, banking and telecoms, and of applications such as the development of smart cities, or in support of the efforts of technology accelerators. The more we speak, the more obvious it is that the vast majority of people know that the current form of capitalism, based on the discredited ideas of neo-liberal economists, is broken. But it is equally clear that the change we need requires radical new thinking and practices in three areas: economics, accounting and management. These changes must also be made simultaneously. A huge challenge, but I believe there is an appetite for it in each discipline. And we can achieve the necessary changes if each ‘profession’ shares a common purpose.

In attempting to advance the professional practice of strategic management, I am arguing its noble cause should be the creation of lasting, widely shared prosperity defined in terms of human flourishing, as I defined it above. Should this not also be the noble cause of accounting and economics? If it were already, they would have to admit that today they are failing spectacularly.

Fortunately for economists they merely need to revisit the roots of their discipline. The early economists were philosophers and their interests were closely aligned with what I am arguing should be the focus today. But economics must address the hubris, which led it astray and still drives it. It is the hubris that manifests itself in the pretence of being scientific in the same sense as the pure sciences, or with the “scientific attitude” as F. A. Hayek called it in his Nobel Memorial Lecture on the Pretence of Knowledge. It must accept that it is, and can only ever be, a social science. And it can learn much from the other social sciences.

“Valueism and social contract accounting are practical management approaches underpinned by strong philosophies that date back to the time of Aristotle.”

As for accounting, the ‘profession’ has been trying, and failing, to work out how to assess the real drivers of value in businesses for a long time. The financials account tells us little about the future value creation capacity of a firm. So many of the real drivers of future value are “intangibles” (knowledge, intellectual property, reputation etc), which do not appear on the balance sheet. Additionally, accounting for the performance of the economy, focused on Gross Domestic Product, tells us little about the real wealth of a nation, for reasons that have been well documented by others and cannot be explored in this article.

To be of any real use financial accounting needs to be supplemented by what I call ‘social contract accounting’. The concept of social contract accounting can apply equally at the society level to replace GDP, in addition to being a means of measuring the performance of organisations of all types and in all sectors, including the public sector, government and non-profit sectors. That is because it does not focus only on monetary value.

The Johnson & Johnson Credo is a simplified early version of what a Social Contract might look like for a firm. In Just two pages it says what value it creates, for whom and how. It defines who it is responsible to, and what it is prepared to be accountable for. If linked to appropriate measures, or key performance indicators (KPIs), this document not only provides clear guidance to investors, it also tells investors how they should judge its performance. It has stood the test of time and served the firm and its investors well. That is not to say the firm has had no problems over its history, but the credo led to decisions that got it back on track when it needed to.

Valueism and social contract accounting are practical management approaches underpinned by strong philosophies that date back to the time of Aristotle. More recently the approaches can be seen reflected in the values and practices of the Quaker industrialists who created great value and much wealth. And the wealth they created produced shared prosperity and social capital investments in the form of model villages. Examples of value-led businesses are to be found in the form of long-lived companies the world over.

Profits were the means to the ends in all such companies, and the ends were always the creation of real value. Valueism is an updated version of these ideas. It is values-led, human-centred and focused on creating widely shared lasting prosperity, or Aristotle’s idea of Eudemonia, i.e., human flourishing and well-being.

The image of a fetus

A fetus is not often associated with business, organisations, institutions or governments. I use it as a powerful reminder that their purpose should be to provide a good and prosperous life to this and future generations, and in support of the argument that prosperity measured in these terms should be the noble cause of the emerging profession of strategic management.



Paul Barnett is founder and CEO of the Strategic Management Forum. He and his colleagues have been giving talks and workshops on the topics of valueism and social contract accounting in business schools, technology incubators and conferences in Vietnam, Brazil and several European countries.