In link with true accounting

July 2014

‘Right’ governance is an important subject, essentially about the need, when acting on behalf of society, for the individual’s actions to be transparent to and respectful of the rest of the world. From this point of view, it goes without saying that when an individual acts on behalf of humanity he wants, of his own volition and out of the ‘logic’ of true social action (that is, action by the individual on behalf of humanity) to report on this activity and to render visible its aims and outcomes. He seeks out a ‘reporting requirement’.

In the stock corporation, the annual general meeting, among other elements, provides the entrepreneur with an opportunity to do just this. He has to report typically on three areas – the results (expressed as accounts) of previous activity, how they relate to the aims of the undertaking, and how he envisages the future. In principle, his re-election depends on his ‘performance’ at the annual general meeting, for it is to him that the shareholders look. As shareholders, they do not and cannot have his vision of things.

One can, of course, modify and use the stock corporation to abuse this privilege, to hide or obfuscate facts, and to ‘spin’ things one way or another, even to give the accounts a certain slant. One can also ride roughshod over those who work in the business or over shareholders who have minority holdings. But such behavior is a perversion or least-best use of the stock corporation. It can as easily be used as a way of establishing internal and external transparency, that is to say, of taking fully into account the interests of all stakeholders.

‘Right’ governance is all about ensuring that when an individual takes responsibility for an activity and thus requires exclusive right of use (ownership) of land and or capital, his use of them is transparent and responsible. His actions are subject to ongoing scrutiny by all stakeholders, including the taxman, regulatory agencies, and so on. Insofar as right governance could be said to derive from a willingness to subject oneself to such scrutiny, the corporation need not present obstacles. Indeed, if one is not ‘up’ for right governance, one is perhaps ill-advised to step into a corporation, because its true ethos is other-serving, not self-serving.

A crucial aspect of right governance is the degree to which it is supported (or not) by accounting. Accounting, like the stock corporation, can be readily distorted, of course; but, by the same token, it can be made ever more explicit. It all depends on whether the entrepreneur and all stakeholders involved in a business want to pay lip service to the inherent logic of accounting by using accounts merely for tax or profit reporting purposes, or whether they use the logic of accounting to look with ever greater precision into the business concerned.

This degree of scrutiny is seldom sought, but the times are requiring it. There is, again, no reason why at the annual general meeting (and throughout the year) the accounts of a business should not become ever more precise. In practice, this will be conditional only on the willingness of the entrepreneur and all stakeholders to go that path. 

It is all too easy to profit by cost avoidance, but true profit begins after all full and true costs have been assumed. This is easily expressed as a piece of rhetoric. For it to become fact, however, all those concerned with a corporation will be challenged insofar as their interface with it, that is the price by which they are linked to it, is not full and true. Full and true pricing means that a price has no element of something for nothing, or of advantage won at another’s disadvantage.

Price and Relationships

The significance of this idea can perhaps be gauged by saying that in normal business parlance all relations with a corporation are expressed as prices – the price of capital, the price of goods bought and sold, the price of labor, and so on. The converse of this is that every price represents a relationship. A corporation, therefore, has to be sure that every one of its prices – both internally and externally – is full and true. Neither the corporation nor the other parties to its transactions should be disadvantaged by them. In other words, full and true prices obtain when each party to a transaction profits from it; when, that is, each can afford to continue his activity, with afford understood in the wider stakeholder sense.

Much of the criticism of the stock corporation centres on its use to further the interests of capital providers only. The interests of other ‘stakeholders’ – that is, those whose lives or livelihoods are affected by the corporation – are disregarded. By paying full and true prices one recognizes the interests of all stakeholders.

This localizes the social responsibility for the Right On Corporation in the entrepreneur, rather than in some external agency. It also locates the ‘solution’ in a sense of fairness as between the parties concerned, and not in an abstraction born of the state or some economic theory.