I just finished an interesting and thought provoking article (hopefully you still have an active HBR account) in the June, 2014 Harvard Business Review.  Written by Christensen and van Bever, the article, The Capitalist’s Dilemma, starts out addressing the question why companies are not investing in ways that create jobs and open new markets.  It ends up concluding that the traditional MBA-based company soundness analysis focused on ratios like ROA, IRR, NPV, etc. are based on the now incorrect assumption that capital is scarce.  Scarce? These days, it is practically free! Combined with the domination of “tourist” shareholders (those who invest in the short term as opposed to the long term – a description that even applies to pension fund investors these days), the reliance on these traditional estimates of return drives firms to spend money to increase their efficiency or performance, usually eliminating jobs, while investing in opening new markets, with its increases in risk and assets, is typically viewed as less financially attractive than simply sitting on retained capital and doing nothing.  Capital is cheap, the authors argue, we should use it, not hoard it.

They also ask the question what we happen if we develop metrics for measuring investments in resources that are truly scarce – like making good people better.  How about time? How do we measure the value of time as a scare resource?  The focus on short term performance has created an abundance of short term capital that is not doing its job to help ensure future success and development.

Any thoughts/ideas on what we can do in our own lives and firms to reflect this change of perspective and corresponding motivation to put capital to use to build a stronger enterprise, not just a set of assets in some overseas company so our ratios appear better?

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