My personal journey: 18 years of Research & Development
LongWealth and its thesis of Productive Durability for companies is an outcome of a personal journey to go beyond the widely accepted models which define and measure the value of an organisation.
This eighteen year journey was prompted and shaped in no small measure by the private musings and dilemmas shared by owners and top teams of leading Indian, European and US groups. Their penetrating questions on the true nature of intangibles and their ambition to build enduring institutions has fuelled our quest.
The meaning of success
What struck me over the years in these intimate dialogues with enlightened owners is their implicitly held uneasiness with what success in business has come to mean. While they were well-versed in modern management theories, they seemed to privately question whether the focus on conventional notions of size and scale and the single minded pursuit of hyper financial outcomes in shorter time frames was consistent with their deep commitment to build lasting organisations. Despite airing their tentative misgivings with me, they seem to be drowned under the constant drumbeat of mechanical efficiency.
As we worked with them it was clear their misgivings were well placed. Consequently, even if they engaged us for a conventional ‘brand valuation’ we dug deep into the body of the firm from its mindset and assumptions, to purpose, culture and innovation and how it all related to each other. When we did so, time after time, it was clear that in light of their true potential, almost every company we worked on – even most iconic groups – was an underperformer.
Curing the decreasing life-span of companies
This, along with the global financial crisis of 2008, strengthened my resolve to find a solution to the accelerating mortality and hence massive loss of wealth-creation potential – to shareholders and other stakeholders – caused by premature death of companies.
It was quite clear that the ability to deliver consistent shareholder returns or grow in size had nothing to with Productive Durability. The time had come to set the balance right between the mechanical aspects of company efficiency with the living qualities of human ingenuity to build purpose, trust, culture and creativity. It was obvious being a mere machine will not do, owners wanted to build Living Machines which held some aspects dear and sacred that could provide an unmatched competitive advantage to ride over time.
Understanding the life force of companies
As we worked with clients, we started to piece together a jigsaw which covered all the aspects which when holistically tried up would account for Productive Durability. The answers partly lay in a poorly understood area of management namely “intangibles”. At LongWealth, we refer to these invisible yet potent elements as “Scarce Capital” – that capital which money can’t buy. They are Purpose, Brand Trust, Culture and Innovation, which account for 60% of the source of value in any modern enterprise.
Rather than merely studying them isolation, at LongWealth we found the true potential of any firm lies in their fully integrated working with mindset of leadership as the thread which holds these Scarce Capital elements in unity. When this Life Force of Scarce Capital is fully marshalled, it produces a significant reservoir of future cashflows which are earned by not released into the P/L. This reservoir resides in the perpetual value, or terminal value, of any company. The LongWealth thumb rule is that it represents 70% of any enterprise across sectors, which is another little understood but significant fact of any company’s value.
Seeing this pattern project after project, LongWealth started to build a bridge between the Scarce Capital sources of the firm with its impact on time value in perpetuity. It fell in place intuitively and objectively, and owners and top teams got to see a picture rarely seen in boardrooms. This always led to a much needed pause, quiet reflection at an individual level and daring to start the journey towards the infinite.
While doing so, we deliberately broke some of the conventional rules in corporate finance, especially around perpetuity which limits management’s ability to see the combined impact of Scarce capital had a here and now impact on the long-term value of a business. In the Living Machine state, finite efficiency is harmonised with infinite effectiveness, the philosophical is very practical and the Intangibles are understood clearly from their impact on Productive Durability.
Prosper over time
If the real purpose of a Living Machine model of company is the stay evergreen and prosper over time, the priorities in managing such company has to be firmly build on the human potential of an individual and tying it up to the collective organisational view, to release the combined hidden potential. We have been inspired to develop these ideas and concepts from the vast and timeless wisdom of India’s ‘Sanathana Dharma and the European philosophical traditions.
It is our view that in today’s hyper volatile environment punctuated by crises of all kinds, the Living Machine model of a company will have the resilient mindset and habits to accomplish their full potential. Being a highly efficient money-making machine alone will not do, as the risks are simply too significant and non-linear.
It has been deeply gratifying for LongWealth to assist owners and top teams to nurture this sacred living force of companies with the intent to hand it over to their successors in a shape and form where it does not need one individual to manage it but instead reliant on an Institutional Memory around the intricate and deep connection between Scarce Capital and Productive Durability. Such an endeavour however hard and demanding on us, moves us and keeps us committed to stay on the path less trodden.
Faith & Courage,
M. Unni Krishnan