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“Green” Accounting: How can we account for intangible costs

What do I mean by green accounting? Allow me to explain with an anecdote.

If you have been to business school like me, you have probably dreamed about someday becoming the high-flying corporate warrior / management consultant who is so important that he has to be flown around the world to attend high level strategic meetings.

In your dream you saw all the perks that go with it like having Senator travel status, eating breakfast in exclusive airport lounges, traveling to fashionable cities, posting flight details on your Facebook feed to attempt to make your friends jealous, and the sense of importance that all of this brings.

The reality is that unless you are a VERY senior player (C-level executive or higher) – or work for a company that somehow managed to stay incredibly financially wealthy and avoided all of the cost-cutting initiatives of the past decade – you will be flying economy.

Most companies have drastically cut costs and now cheap out on nearly everything.

You won’t get to fly business class unless you have to fly over an ocean or between continents, and maybe not even then. So there you will sit, in economy class like all the other schmucks – except you’ll be in a suit and tie, so it’s really you that’s the schmuck.

My experience with business travel

My boss and I had a meeting in London, which is about a 90 minute flight from Zurich. The meeting was only for one day and the company would not pay for an overnight stay, which meant that we had to take the earliest possible flight and return the same day, or pay for accommodation out of our pockets.

I woke up at 4:00 am to be ready for my boss to pick me up at 4:30. Our flight was at 6:20. We waited in the airport lounge to which my boss’s Senator Status afforded him privileged access. We had coffee and a simple breakfast.

Our time in London was spent traveling to an office and staying in that office all day in a meeting with our IT software supplier. We were there to discuss technical issues and set the agenda for further IT development. Both of us were tired from waking up at 4 am.

This had an intangible cost. How much better would the meeting have been if we had both been well-rested? Would our increased mental alertness have helped us to identify more potential issues, thereby saving time and money in the long run? Would we have been in a better mood and had a more engaging interaction with our suppliers?

After the meeting we went to a pub with some others from that office, including London-based Partners. It was nice to have beers with some big players, but being so tired from the short night of sleep and the long day of meetings, I wasn’t nearly at my best self. Another opportunity for interaction that could have been improved if the company had simply allowed us to stay over a night earlier and get some rest.

My boss had opted for a later flight out of London so that we could have those beers. However there was no time for dinner included, and we returned to Zurich so late in the evening that the only food I could find was McDonald’s. I finally got home just after 1 am.

I was so tired that I skipped out on work the next day.

About a month later, my boss wanted to take that same trip to London. I told him that I thought I could make it to the airport by myself and that he didn’t need to pick me up. I took the earliest possible train but still arrived at the airport too late and ended up missing the flight.

Naturally and justifiably, he was pretty annoyed about that when he called me into his office the next day.

He told me that business travel was a “privilege” and that although he knew I didn’t do so intentionally, I would forgo this privilege if it happened again.

All I could think was that there was almost nothing about this experience that made me feel privileged. I had to wake up at an inhumane hour, spend the entire day sitting a meeting room in London, forewent a solid meal and arrived home so late in the evening that I was missed a day of work due to fatigue (my boss would likely have preferred that I “soldier through” instead).

I suppose that I was expected to feel a certain level of status or prestige for being made to attend a faraway meeting that the company paid for, and rub elbows with the “big dogs” so that I could feel like I was in the “Cool Club”.

But the narrow-minded approach to costs ruined the experience for me. The company only looked at the tangible dollar cost when deciding to send us to a business meeting and did not consider any intangible productivity losses.

The experience also felt unhealthy. I was sleep deprived and under nourished. My overall health condition had decreased for the sake of the business. Under-nourished and sleep-deprived employees are also more likely to get sick and miss work, which is yet another hidden cost. Sick executives, under cost pressure and worrying about the cost of being sick, are also likely to work through their illness and bring it to the office, making others sick and further increasing costs.

Most of these guys looked terrible. People who I thought were at least 40 were only in their early 30s. The grind of a numbers-based life clearly exacted a visible tool on some people.

Can we find a new way of cost accounting?

We intuitively understand that capitalism in its current form needs to change. A big part of this is the way in which a company calculates its costs.

Current cost analysis does not take into account intangibles such as pollution caused to the environment and certain employee health costs.

As of this writing, there isn’t a reliable way to measure them. But they must be accounted for somehow because they certainly carry a cost, which is typically borne by the general population and not by the corporation that profits.

For example: A factory whose emissions pollute the air or a nearby river. This causes damage to the environment and health of the ecosystem around it which is an obvious societal cost. But the company does not have to pay these costs and they are not considered in their accounting. The area where the factory was moved to is now an undesirable location for residents. What happens to those people who owned homes in the area before the factory moved in? Their real estate value will likely depreciate. Who pays them for that?

I don’t know how this should be done because we also don’t want to over-regulate to the extent that it totally destroys business.

There must be a way to measure these things.

Studies have been conducted which attempt to measure the productivity loss of insufficient sleep: see studies referenced in the Financial Times and Fortune.

Most of these studies are qualitative. The study mentioned in Fortune is quantitative but only looks at the cost to an overall economy.

But it seems that a study could be done that quantifies individual productivity and brain function decline due to insufficient sleep – ideally in a percentage of functionality. Its certainly not perfect to quantify all of the human factors that go into productivity such as energy and happiness, but it needs to be done so that the effect can be converted into a nominal value. This is the only thing that financial accounting understands.

Many other studies have attempted to quantify the damage of pollution on the environment, for instance this one by the OECD.

What if there were special tax regimes that rewarded companies for such “green accounting”? Some portion of the tax savings could be diverted directly to the affected community. It would be preferable to reward “good” behavior than punish the “bad”. This would at least address some of the environmental externalities.

 

 

The bottom line: we know these things have a cost. And studies have been conducted which quantify these costs.

How do we encourage companies include such costs in their accounting without scaring them away from doing business in our country?

What do you think? I’d love to hear your ideas on this.

 

 

 

 

 

 

 

Kevnice