Commons Accounting Revolution

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Why Must ‘the Commons’ Push Parliaments for an Accounting Revolution ?

Bangkok, November 19, 2012 /Thomas Olsen, Associate Rushmore Professor, Int’l Relations


Thomas Olsen:

"With a few clicks on your computer’s keyboard you can access news that reveals the most horrifying examples of poor management, taking place in broad daylight, in the so-called ‘developed world’. Let’s take the now virtually bankrupt airline SAS (in the past known as Scandinavian Airlines) as an example.

Over the last ten years has this joint flag-carrier of the three Nordic countries Sweden, Denmark and Norway shed half its workforce, down from 30.000 to 15.000 (1), some of which are through asset sales - generating revenues of some 80 billion SEK (funds which are since long consumed) - while some are through ‘early retirement’ schemes and outright layoffs. During the same period SAS accounted for losses of 12.5 billion SEK (2), and during the last half of this period alone have the shareholders injected 11 billion SEK (3) in order to cover these losses. Now SAS wants (or needs as it says) to shed another 6.000 staff, the majority of which will disappear if/when selling its few remaining profitable units for (hopefully) another 3 billion SEK (4).

To put this in perspective, think of one SEK as being approximately 1/10 of a Euro.

In summary this means that if the now final straw for survival is approved by the owners, employees and banks - in a last-ditch attempt to avoid going bankrupt - SAS will have downsized from 30.000 to 9.000 staff over ten years, in the process having lost a staggering 10 billion Euro all in all; eight billion in ‘reinvested’ sales-revenues (now lost), over a billion in losses covered by capital injections by owners, plus over 50% of its equity - which is what now makes it liable for bankruptcy.

The share-price is consequently down 98% since just a few years ago, and its entire stock is today valued at less than 2 billion SEK (today equal to well under 200 million Euro). Interestingly enough is one of the subsidiaries it sold already in the 1990’s (the Radisson Hotel Group) today valued at 3.5 billion SEK (some 300 million Euro) (4).

This information is (as seen from the footnotes) simply taken out of the mainstream media coverage of a company in crises. This summary is therefore neither a complete - nor necessarily 100% correct - analysis of what has happened over the last 10 years. What is well understood is however that low-cost airlines have changed the rules of the game for commercial aviation, and that this 50% state-owned set-up (by 3 states; Sweden holding 21.4%, Denmark and Norway holding 14.3% each) has been unable to adjust to this change.

However, what this paper wants to highlight is exactly this: We, as readers, individual share-holders (where ‘other’ shareholders with smaller holdings than 0.2% each, as of December 31, 2011, made up for 32% of its total stock), and/or taxpayers, can’t grasp the enormity of these losses. What do they actually mean or represent and what would or could have been the alternatives?

Those who possibly know this are either past or current members of this company’s top management, appointed bureaucrats managing the respective state’s portfolio, or our elected politicians. One can also assume that the managements of the institutional shareholders, holding both larger stakes in the privately traded 50% of company and seats on its Board, are well enough informed.

But assuming all these people are either professional, well remunerated corporate managers, hand-picked bureaucrats, or freely elected and supposedly responsible politicians, how come the result is so disastrous?

A key to this riddle is the accounting systems that all countries have and vigorously enforce. They are designed to give a picture of operational costs and revenues, as well as the solidity the company has; i.e. how able it is to actually carry losses. They don’t!

What are for instance the operational costs for an airline? Staff, fuel and airport fees you may say. Correctly so, but what about the huge ecological footprint this industry brings? And what about the problems it causes to people living close to an airport?

But turning the tables, if a state-controlled employer (like SAS) reduces its workforce by 20.000 staff over 10 years, what will the consequences on people’s livelihood be – and what will the consequences be for the state itself?

If SAS did go bankrupt will – undoubtedly - other players take over all the potentially profitable routes. But what about those routes that inevitably have more of a logistical than a profitability argument, i.e. small communities with minimal passenger-numbers whose participation in a globalising world simply gets easier if served by an airline, in spite of the route being hopelessly unprofitable? Wouldn’t they risk losing the service altogether, and would this in turn not constitute a social cost of some sort?

These are just examples of costs and ‘benefits’ that our current accounting systems simply ignore. Note here the use of the term benefit rather than revenue. This is, quite obviously, a key issue. But to make the equation complete should also the term ‘cost’ be replaced. But is the term ‘detriment’ pointing in the right direction? No, not really.

Perhaps could we rather start discussing accounting in terms of ‘advantages’ and ‘dis-advantages’? This would include a much broader scope where the ‘bottom line’ would equal the operation’s net advantages or net disadvantages. It is quite obvious that if an operation’s bottom line equals a net disadvantage, it needs to be changed.

My only point with introducing this accounting-topic by using the case of SAS is that either there is an advantage of having a flag-carrier, one that not only can take on to run also unprofitable routes - in the name of the benefits they offer those served (who also happens to be taxpayers) - at the same time as it also takes macro concerns into consideration (such as environmental and/or social-/employment-related), or it is not.

The problem is that the accounting systems that currently force SAS to either declare bankruptcy or shrink to a shadow of its former self, doesn’t give us the answer to this.

If there is a net advantage in running SAS with a wider network and more complete services, then there just may be a way to account for this. If so, SAS should continue operating the best way it can, to maintain those advantages. If SAS’ bottom line is a net disadvantage, SAS should have been closed down, or sold out, long ago, and our politicians should be penalised for having spent ten years wasting tax payers’ money on a net disadvantage.

The same goes for all companies. If their bottom line is a communal advantage, they should be encouraged to deliver – and further improve on – this advantage. If, on the other hand, their bottom line is a communal disadvantage, they should be forced to re-design their business model and/or production processes in order to move their bottom line to a net communal advantage – or close shop! Who needs a net disadvantage?

This is not a proposal for Utilitarianism. Utilitarianism advocates that everybody shall act so that the largest communal net is achieved, even if this means that the individual suffers. Here is someone’s personal suffering weighed against the collective’s gains.

In order to avoid utilitarian trade-offs, where a company could be forced to e.g. lay off staff because of its need to change business model or close down, due to an accounted net disadvantage, is it not only the way in which these advantages and disadvantages are accounted for that are of key importance - but also the crude incentives offered to the managements for actually trying to achieve a net communal advantage rather than a mere surplus of money.

The answer to this is simple: Taxes.

By taxing anything that is a communal disadvantage very much higher than what is a communal advantage, the state can easily direct any organisation’s operations to what constitutes a net communal advantage. Broadening the area of accounting, expanding the scope from ‘revenues’ to ‘advantages, and from ‘costs’ to ‘disadvantages’, adding the socio-environmental aspect to what this entails, would give the state all it needs to redirect socio-economic processes from harmful to beneficial.

The problem is that the state is enslaved by the corporate, and the corporate prefers it ‘business-as-usual’. This is where ‘the Commons’ must enter the stage.

By engaging what Jürgen Habermas called the ‘public sphere’ - i.e people like you and me - in policymaking, we could ensure that our interests are properly taken into account. Be absolutely sure; as former controller, corporate manager and World Bank consultant, I can reconfirm that our current corporate accounting and taxation systems don’t do that. The same goes for our national accounts, dominated by parameters used to measure GDP and ‘growth’, both measurements by now since long well proven not to indicate the qualities we citizens - as human beings - benefit from.

The reason why Habermas’ public sphere is important is that it actually identified the role of the people also beside our role as electorate. Habermas recognised that people have both the right and the desire to influence their elected politicians also in between elections. That is true democracy, and that is how we could make ‘change’ happen.

The small but progressive German university Leuphana University in Lueneburg is conducting a research project titled: The Principle of Democratic Representation in a Globalising World: A Gap in the Governance Literature? From this kind of projects will, hopefully sooner rather than later, new and better models for local versus global (often called glocal) governance emerge, by which this kind of seemingly ‘impossibly difficult’ issues actually can be addressed - also by ‘us’ who are ultimately affected."


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