International

Accounting and Inequality

A downloadable version of this blog is available here.

Inequality is the most pressing issue of our times. From Joseph Stiglitz and Oxfam’s recent research to the IMF and the CEO of Goldman Sachs, many are citing it as a critical issue leading to poverty and unstable societies. However, it is not just the broad brush issues that are affected by inequality. In The Spirit Level, Kate Pickett and Richard Wilkinson made a strongly evidenced and compelling argument that inequality contributes to a wide range of society’s ills, from prison sentences to mental health, life expectancy to teenage pregnancy. It is becoming increasingly clear that it is narrower income differentials, rather than infinite economic growth, that produce happier, healthier and more resilient societies.

This problem of inequality is systemic and getting worse. In the UK between 1977 and 2013, inequality, measured by the Gini coefficient, increased by 42%.1 In January, Oxfam announced the combined wealth of the richest 1% will overtake that of the other 99% in 2016. Whilst there are disagreements as to whether social mobility is decreasing, politics, journalism and legal professions in the UK are still dominated by people who have gone to private schools. And countries with higher levels of income inequality have lower levels of social mobility.

Inequality is also expensive – and economically inefficient. Research from The Equality Trust found that social impacts of inequality: poor mental health; high crime rates; and low life expectancy, costs the UK over £39 billion a year.2 The rich increase spending on security services they wouldn’t otherwise need. Inequality reduces wellbeing for both rich and poor with higher rates of depression and lower levels of trust. In the worst instances inequality leads to social and political instability.

The solutions are consequently unlikely to be straightforward or superficial. It will require a radical approach to change this broken system.

We believe that a major issue at the root of inequality is that of resource allocation. Currently, investment decisions that lead to capital flows and allocation of resources are made on the basis of the price signals that are sent to the investors. These price signals are informed by an organisation’s financial accounts. So how are these accounts prepared? The current system is to prepare accounts with a supposed, hypothetical investor in mind. This hypothetical investor is assumed to be solely interested in the maximisation of wealth. The accounts therefore exclusively reflect this interest.

So the first assumption is that our hypothetical investor is only interested in wealth. The second assumption is that this is an accurate reflection of real investors; that what matters to them is solely a financial return on their investment, and no other criteria are factored in to the decisions they make.

These assumptions are rooted in the model of neo classical economics. This operates on the idea that human beings are entirely rational, wealth maximising individuals who act in a consistently self-interested manner. In practice, the assumption clearly does not bear out. As well as most people’s real life experience that humans do not behave in this way, there are countless psychological examples in decision theory that demonstrate a much more nuanced, complicated and ‘irrational’ decision making process in human beings. Whilst modern day economics has changed (to a certain extent) to adapt to these findings in behavioural psychology, accounting has not moved on; it is still stuck with this concept of a super rational, wealth maximising individual.

So where does this leave us with inequality? There are two questions that we can ask ourselves at this juncture. Firstly, does this hypothetical wealth maximising investor accurately reflect all investors? Secondly, even if it is an accurate reflection; do we really want to live in a world where accounts are prepared with this in mind? Or would a world where accounts are prepared in the public interests to enable companies to be held to account and encourage transparency be preferable?

To address the first question: investors surely do make decisions on evidence other than the financial impacts of a company. Many investors, and indeed consumers, would also make decisions based on a company’s social and environmental impacts – does it use child labour? Does it poison the environment through dumping of toxic waste? If these sorts of impacts were included in the financial accounts of a company, and subjected to external auditing to examine whether the impacts were a true and fair representation of that company’s accounts, investment and therefore resource allocation decisions would be reflective of these impacts. Companies which were more transparent and more accountable for their actions would demonstrate a better return on investment – where return means all material types of value, not just financial. Resources would therefore be directed towards ventures that demonstrated accountability to their stakeholders for all types of material value that were created and/or destroyed.

To address the second question from above: even if it is true that investors are solely interested in maximising their wealth, surely the world would be a better and more egalitarian place if accounts accurately reflected a range of impacts, rather than just the financial? If we would prefer to live in a world where resource allocation decisions are made on this wider basis, then it is time to change public policy to reflect this.

To make this world more equal, we need profound and systemic change. Resource allocation decisions lie at the root of current inequality, and changing the evidence used to make these decisions gives us a real chance at making this change and moving towards a more equal, and therefore healthier, safer and economically stable society.


1 Data from Gini Coefficient graph, the Equality Trust. Original data from DWP.

2 The Cost of Inequality, The Equality Trust (2014)

 

 

Social Value Budget day...?

Every year there is a huge amount of excitement around the Annual Budget. Along with the autumn statement, the event is a landmark in the political calendar and is preceded by weeks of speculation how it will affect business and people's standard of living.

Of course this is very important but policies to increase income and change taxes are only part of the picture. Income is an important part of our wellbeing but other things contribute as well. Health, security, education, culture, community relations and the environment all play a part and often inform people’s voting intentions.

Its time that we had a social value budget announced alongside the financial budget.  Advances in measuring and valuing well being now make this much more possible.
 
This would give us more clarity on how government proposals are expected to affect other aspects of our lives. It would make it more transparent and easier to compare and debate alternatives.
 
A combination of the financial budget and a social value budget would bring government's purpose, the wellbeing of citizens, into focus.

The SROI Network response to Social Value Act Review

On the 13th February, Lord Young released the much anticipated review of the Social Value Act. The growing interest in social value, what it is and how we can produce more of it, is encouraging and a revision to the Act is a great opportunity to make this easier for commissioners whilst ensuring that local communities are really benefiting. More social value is being created than before.

And so it was a disappointment that the Act has not yet been extended to include goods and works. The SROI Network’s aim is to change the way the world accounts for value, across the board. Incorporating social value into all procurement decisions is a natural step.

One of the issues raised by Lord Young before the Act can be extended or given more statutory permissions is measurement. As stated in the report, 'whilst potential bidders are able to articulate the social outcomes they will provide, there is a lack of consistency and rigour around how these outcomes are quantified. This can make it harder for procurement officers to be reasonably objective when they are evaluating social value bids, and make it more difficult to assess the additional value for money provided by a social value offer.' (pg.11)

This means that measurement of social value is not yet developed enough to provide commissioners with adequately robust measures which can be compared between bidders.

Challenges around measurement and clarity of definition of social value will of course contribute to a lack of take-up and inconsistent practice. As Hazel Blears said in Hansard in September of last year, “This is a plea to the Minister: we have to have consistent principles and grounds for the measurement of value”[1].

It is this consistency in the principles, rather than indicators or values that will enable different values to be compared between each other, and decisions to be made on this basis. That is why we have had a set of seven core, consistent principles that lie at the heart of SROI. This enables different types of value to be measured in the same way, according to the same principles of best practice, but suitable for different levels of rigour, depending on the organisation’s purpose.

It is also important that we do not lose sight of the linkages with the public sector’s existing approaches to thinking about value, for example through the need to ensure value for money, cost benefit analysis, and business case requirements to support expenditure programmes.

The National Audit Office defines Value for Money as 'the optimal use of resources to achieve the intended outcomes'. We would want to be clear that assessing value for money must also take account of non-intended outcomes. However if the focus is on outcomes, and these have been determined with the involvement of those who will be affected by commissioning decisions, then social value will be aligned with value for money.

The Business Case, specifically the Five Case Model, is designed to ensure public value is being achieved through spending decisions. Again there is a strong relationship between social value and public value.

The challenge is to make the approach to measurement appropriate for commissioning decisions, whilst remaining consistent with existing requirements. As the measurement of social value develops and helps commissioners make choices between bidders, the SROI Network would recommend that our principles are used as the basis which will contribute to comparability without falling into the trap of pre-determined lists of indicators that are thought to represent all the important sources of social value. The Treasury were part of the steering group that resulted in the Guide to SROI and its principles and we would recommend therefore that the NAO and Treasury are closely involved in developments.

For more information on our SROI principles, you can download our Guide to SROI or our 2-page principles document.

We also hope to contribute to an increase in social value commissioning and creation through our Social Value Commissioning site, with its database of case studies and resource documents. We were also happy to note that the Guide and our SROI Self Assessment Tool are both referenced in the report as useful sources of more information.

Useful links:

Download and read the full report here


[1] Hansard, 2nd September 2014: http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm140902/halltext/140902h0001.htm

SROI Case Study: Link Group, Scotland

You can download a pdf of this case study here.

Link Group is one of Scotland’s leading housing, regeneration and support organisations, providing services to 10,000 families and individuals in 26 Scottish local authority areas.

Sheila Maxwell, Link’s Community Regeneration Officer and an SROI Accredited Practitioner, explains the varied ways that they use SROI across Link’s activities to help them improve their services and win contracts.


1. What does your organisation do?

Link Group is a registered social landlord and social enterprise offering a wide range of housing, support and regeneration services for individuals, families and communities, with our activities mainly concentrated in the central belt of Scotland.
We were formed in 1962 to provide housing for rent to those on low incomes and for people with specific housing needs including the elderly and people with disabilities. 53 years on, Link Group now operates in a variety of areas including:

  • community regeneration services such as employability and financial and digital inclusion
  • tenancy support services
  • local and Scottish Government contracts including care and repair services, private sector leasing, Help to Buy (Scotland) and Help to Adapt
2. Why are you using SROI and how did you go about it?

Our involvement with SROI goes back to 2008. Our original interest in SROI stemmed from the Scottish Government and their SROI project. We felt that we wanted to be able to demonstrate additional impact of our services, not just on a ‘cost benefit’ level, and then potentially use this to improve our service delivery and develop partnerships with identified stakeholders. SROI seemed like a good option.
After going on the practitioner training course, I conducted my first SROI analysis on Link’s Older Persons’ Advice Project. During this experience, the mentoring I received from Sheila Durie, another accredited practitioner in Scotland, was invaluable. This was all back in the early days of SROI – we didn’t even have the Guide to SROI to help us when we started the process!
Since then I have written a couple of other assured reports, and completed analyses on other areas of our work.

3. Has SROI been useful? Have you changed anything as a result of SROI?

Definitely! It’s been very useful for Link Group, its customers and stakeholders.

i. Funding and contracts
We have discovered different dimensions to our service delivery that we were not previously aware of. This has then given us access to other funding sources and new partnership relationships. For example, intermediate outcomes that we identified on the Older Persons Advice Project were used to then gain additional funding.
Other SROIs have been useful as they help us to develop bids and funding applications.

ii. Changed decision making
It’s probably true that the original reason we engaged in SROI was to help us to gain access to funding and confidently demonstrate our positive social impact to stakeholders. However, it’s actually been incredibly useful in helping us to evaluate and improve our services by informing key decisions about delivery.
For example, SROI has helped us with assumptions about our stakeholders. An SROI we conducted on our RealLiving Befriending Service in West Fife (a service to help older people including those affected by dementia) found that the service actually made an equally significant difference to the carer of the client, as to the client themselves. This helped us to change the way we thought about this particular service.
A different example is from when we did an SROI report on Care and Repair services in West Lothian in 2013. One of the big realisations was that we needed to improve our relationship with the NHS and partnerships with other health and social care providers.

iii. General Monitoring and Evaluation practices
We have adopted some principles of SROI in our monitoring and evaluation practices. We ask questions about baselines as a standard part of our initial customer engagement, and include questions about ‘difference made’, rather than just outputs. I believe this has improved the quality of our surveys and feedback across large areas of Link.

iv. External Communications (reputation)
We’ve also found that using SROI has given us an enhanced reputation as a sector innovator – we’ve been involved in promotion of SROI at workshops and events across Scotland and beyond, including the National Australian Housing Conference in Brisbane and Citizens Advice Scotland Conference.

v. Internal Communications
One other less obvious benefit is the difference that SROI reports have made to staff morale. After being involved in the production of an SROI, stakeholder engagement or reading the analysis and case studies afterwards, staff feel less like a cog in a wheel; it puts them more in touch with the difference that they are making on the ground.
SROI also helps to spread information about our services to other parts of Link group – incredibly useful for an organisation of our size and diversity.

4. What would you do differently next time?

A few pieces of advice I’d give to others:

  • Be clear with all concerns about scope, audience and purpose of SROI report before you start
  • When thinking about the above, always factor in extra time for stakeholder involvement. We often assumed that would be equally easy to involve stakeholders across services – in practice this wasn’t true. The nature of the service will influence how easy it is to engage with family members and other stakeholders
  • If you’re new to SROI, get mentoring support or at least peer support
  • You don’t necessarily have to do a full SROI report. Think about which elements are most important to help you to understand your stakeholders and the way they interact with your service.

SROI and Cost Benefit Analysis: Spot the Difference, or Chalk and Cheese?

This blog will aim to look at similarities and differences by comparing the two from the perspective of each SROI principle. It's also available for download as a document here.

Though SROI does draw from Cost Benefit Analysis (CBA), it developed drawing on two other traditions; sustainability accounting and financial accounting.

1. Stakeholder involvement

This principle is fundamental to the SROI approach, and is followed in all aspects of SROI. It is especially important to involve stakeholders when trying to determine outcomes, or the changes that result from an activity.

CBA can focus on a particular policy issue that is being considered, and doesn’t implicitly require involvement in deciding what outcomes are, though they may be consulted.

2. Understand change

Both CBA and SROI focus specifically on change, predominantly change in situation, capacity or behaviour with related changes in wellbeing. The only slight difference is that SROI has an assurance process to ensure completeness of change.

3. Only include what is material

This principle identifies the most notable difference between the two approaches.

CBA is an aspect of welfare economics, so begins from the perspective that all welfare effects will be included. In practice, however, it often focuses on a particular policy outcome with some recognition of unintended consequences. Whilst it is not possible to consider all welfare effects, focusing on a policy objective without stakeholder involvement risks omission of important effects.

SROI on the other hand recognises these limitations and aims to include material outcomes, drawing on financial and sustainability reporting, which hold materiality as a central tenet.

Materiality is not the same as proportionality. Materiality requires a decision to ensure that the outcomes included, both positive and negative, are those that, if omitted, would affect the decisions of the stakeholders. This process requires a judgement on the extent to which stakeholder groups are split into smaller groups which experience different material outcomes – a balance is required between considering every stakeholder as an individual case with a personal outcome profile, and aggregating stakeholders together and so risking a loss of understanding how different smaller groups experience different outcomes.

Proportionality means that the extent or depth of the analysis should be tailored to the relative size, impacts, and risks of the activity under analysis.

4. Do not overclaim

This need to consider benchmarks, counterfactual, attribution and displacement is shared by both approaches.

5. Value what matters

Whilst both approaches use money to value benefits, the valuation technique and/or perspective from which the valuation is taken can differ.

Many CBAs focus on value from the perspective of real, potential or imagined savings to the public sector. This value can either be expressed as an indirect financial value to the taxpayer, or sometimes as a proxy for achieving a stated social policy goal.

Although some SROI analyses do use these types of values, they also aim to value outcomes from the perspective of the stakeholder. This could be by using revealed preference, stated preference, or (more recently) wellbeing valuation techniques, applied as appropriate to the outcome or stakeholder.

6. Be transparent

This principle should be another area of overlap between SROI and CBA.

7. Verify the result

SROI follows accounting and some sustainability reporting by requiring appropriate verification of the result. This may well take the form of an external assurance process, but could include a range of other methods of verification (such as going back to the stakeholders and asking their opinion on the results of the report).

The reasoning behind this principle is that an SROI analysis will inevitably include judgements about what is included or excluded, and these judgements need to be reviewed as reasonable or unjust.

CBA does not have an audit process. However, since judgments on what is included and excluded are made and the audience need to know whether these judgements are reasonable, an external assurance of those decisions, acting on behalf of those affected, is required.

Other similarities and differences: Audience and purpose/rigour

CBA tends to be used by the public sector or quasi-public sector, so is often applied with a reasonably high level of rigour.

In contrast, SROI principles can be used at any level of rigour, as long as it is ‘good enough’ for the type of decision it is being used to inform. In this respect it is similar to financial accounting, which aims to provide information that is good/accurate enough predominantly to inform investors, as opposed to social science levels of rigour.

At one end of the spectrum SROI can use similar levels of rigour as CBA, with additional requirements for consideration of materiality and assurance/verification. At the other end of the spectrum a much lower level of rigour could still be good enough for board-level strategic decisions within organisations.

An illustration of this would be the Maryland Scientific Methods Scale. This is a scale that ranges from 1-5, and indicates the level of scientific rigour of a particular study. At the top end of the scale lies Randomised Control Trials (RCTs), which can be used in an SROI context but depends on use and purpose for the SROI analysis.

At the bottom end of the scale would be an assessment of the counterfactual simply by asking beneficiaries what would have happened otherwise when they enter a program, and does not have any other use of control groups etc. This type of rigour would be unlikely to influence policy, but is still useful for designing services.

This different application of rigour in SROI applies to valuation as well; an estimate for a value may be good enough for a particular audience. Similarly, in accounting we see examples of judgement being used in figures such as the bad debt provision.

In summary, whilst CBA and SROI do have areas of overlap, their differences originate from the fact that SROI is additionally informed by financial accounting and sustainability reporting, particularly with respect to materiality, verification of a result, and use of different levels of rigour according to use and audience.