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Above and beyond: certain business issues are simply too complex to be decided by sticking to economic principles. David Allen ponders the need to take the financial management profession to a higher level.

In terms of its place in the overall scheme of things, management accountancy is a subset of economics. For those of us on the financial management side in particular, it has been a practical manifestation of microeconomics--ie, helping to maximise the value of individual businesses by way of disciplines such as investment appraisal and cost control. For those on the accounting side, it has been about macroeconomics--ie, putting information about businesses into the public domain in order (in the words of the accounting standards literature) to help investors make economic decisions.

Both aspects have therefore been crucial strands of society's approach to solving "the economic problem": how to allocate scarce resources in the face of infinite demand. In our work, most of us will have been influenced by Adam Smith's concept of the invisible hand of the market and taken it for granted that whatever is good for the individual business is also good for society as a whole. But, in keeping with the observation that any powerful concept is pregnant with its counter-argument, the tremendous progress that has been made in the economic sphere has heightened the relevance of John Keynes's warning about the obsessive pursuit of productivity and competitiveness. "Let us not overestimate the importance of the economic problem or sacrifice to its supposed necessities other matters of greater importance and more permanent significance," he wrote.

In short, greater affluence makes it possible to act in a way that is, apparently, uneconomic. A growing proportion of the population is prepared to think beyond the economic frontier. There are many examples of this, but four are enough to make the point.

First, consider the extent to which the topic of sustainability now appears in management literature. Its advocates argue that the price mechanism does not allow for the destruction of forests, the exhaustion of fossil-fuel reserves and so on. Some consumers are prepared to suspend the normal rules of economics and pay a premium for products that are certified as having been produced in a sustainable way.

Second, think about the quality of the environment, which globalisation has pushed closer to the top of the sociopolitical agenda--one country's waste being another's water, air or land pollution. The European Union is in the vanguard with regard to the need for much more recycling, but who bears the costs?

Third, we have concern for the rights and welfare of other people. We have had pressure to end sweatshop conditions in countries supplying well-known brands and we have also seen the rise of the "fair trade" movement. Some consumers are prepared to pay a premium for, say, coffee if they are assured that the benefits will be passed all the way back to the farmer. But chapter one of the economics textbook tells us that an increase in price is likely to encourage an increase in supply, which already exceeds the demand--hence the weakness in world coffee prices.

Lastly, one of the hottest topics in the UK recently has been international outsourcing. The law of comparative costs tells us that the exportation of jobs is a good thing, because consumers benefit from the lower prices that become feasible and resources are released for investment in more productive areas. But, if you talk to those "resources", you might wonder whether increasing productivity is paramount, since a number of them will face long-term unemployment.

This brings us to the crunch issue: how, in a modern setting, do we monitor progress? The conventional measures--for instance, growth of domestic product and international comparisons of productivity or efficiency--don't ring true, not least because they incorporate no assessment of the impact on future potential. If progress is defined as movement towards a chosen destination, how can we ignore the future?

Regular readers will discern an echo here of my rejection of the accounting model as a basis for making and monitoring strategic decisions. It's easy to improve reported performance in terms of profits, return on assets or earnings per share by skimping on the investments (research, marketing and training) that create the intangible assets (innovation, reputation and skill) that are vital to managing in conditions of rapid change.

The solution in that case was a structure characterised by the three Ps: seeing progress as the algebraic sum of performance (which could be measured) and the change in potential (which could only be assessed). I was always warned not to project on to a macro canvas an idea that had been successful at the micro level, but that does not rule out raising the issue.

As the professionals most closely associated with the provision of information for making and monitoring decisions, using concepts that go beyond what can be measured, shouldn't we be addressing the question of how to tackle the sorts of issues I have highlighted, where economics is not seen as adequate? Given that the mark of a profession is its concern for the wider public interest, if what is good for the individual business can no longer be assumed to be good for society, where do we stand?

David Allen CBE, a past president of CIMA, is a director of a number of private companies and an adviser on strategic financial management
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Title Annotation:Management
Author:Allen, David
Publication:Financial Management (UK)
Geographic Code:4EUUK
Date:Dec 1, 2003
Words:866
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