A necessary instrument for true pricing

September 2013

It is surely time for businesses of all kinds (first, second and third sector) to adopt what one might call full and true costs, meaning costs without any element of something for nothing or of advantage won at another’s disadvantage. Meaning also full and true prices – that is, the prices that obtain when each party to a transaction profits from it and can afford to continue his activity.

This implies, of course, the adoption also of full and true accounting. Accounting can be readily distorted, of course; but, by the same token, it can be made ever more explicit. It all depends on whether the entrepreneurs and 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 no reason, for example, why at the annual general meeting (indeed, throughout the year) the accounts of a business should not become ever more precise. In practice, this will depend only on the willingness of entrepreneurs and stakeholders to go that path.

It is all too easy to profit by cost avoidance, so we need a concept in which 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 business 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 – no element of something for nothing, or of advantage won at another’s disadvantage.  

The significance of this idea can perhaps be gauged by saying that in normal business parlance all relations with a business are expressed as prices – the price of capital, the price of goods bought and sold, the price of labour, and so on. (The converse of this is that every price represents a relationship.) If a business is to meet this challenge, therefore, it has to be sure that every one of its prices – both internally and externally – is full and true. That is to say, neither the business itself nor the other parties to its transactions should be disadvantaged by them.

To pay full and true prices serves is in the interests of all stakeholders. The concept of stakeholder is somewhat elastic, of course, depending on one’s point of view. Thommen (1996), for example, speaks of all those who have contact with or are affected by a company from government to consumer, bankers to unions, owners to employees. Others, such as Wheeler and Sillanpaa (1997), organize the stakeholders in terms of social and non-social, e.g. customers and the environment, and then again primary and secondary. As used here, ‘stakeholder’ is understood in the widest sense to mean not only those people directly party to the business’s activity – other lenders of money, the workforce, customers and suppliers – but also those affected indirectly by whether the business avoids taxation, damages the environment, repudiates pension agreements, socializes its losses, and so on, not to mention whether it engages in quasi or outright balance sheet fraud.

Needless to say, ensuring that a business is characterized by full and true pricing is no light task. It contradicts head-on the concept, central to modern economics, of ‘externalities’ or, to be blunt, the avoidance of the full and true costs of doing business. And it entails a degree of accounting and accountability higher than even today’s culture of transparency. In so doing, the aim is to become conscious of the effects of one’s activity: not only the contribution it makes to, but also the demands it makes on, the rest of the world.

Full and true accounting localizes the social responsibility for any business in the entrepreneur or those who run it, rather than in some external agency. It also calls for a sense of fairness on the part of all parties concerned, rendering unnecessary today’s many corporate social responsibility (CSR) concepts. Though well-intentioned, they are are often bolt-on abstractions born of the state or some economic theory, rather than the result of inherently social actions. The true ground for real change is not that given to us by external regulation, but what proceeds from our consciousness and our conscience.