The initial article from Paul Fabra is available here: Qu'est-ce que l'équimanagement ? | Les Echos. Comments from François Brunet are available here: Equimanagement | Les Echos. An English translation of the article is given below:
By Paul FABRA - Published June 23, 1995, 01:01
The dramatic mistake of the government and employers is to believe that, to reverse the trend of rising unemployment, one must keep spending ever more money. A decisive breakthrough could well come from a completely different approach. Could there be a latent divorce between the usual methods of business management and the functioning of the market? This seems to be suggested by an analysis based on well-known management concepts, to which is added a particular attention to a well-established market law, also long neglected. From such a reconciliation, increasingly tangible effects on employment should emerge.
Forged by an independent researcher, consultant, and IT professional, Dominique Michaut, the concept of equimanagement is both an investigative instrument and a practical tool. It highlights the hidden separation and proposes a logical remedy. The central idea is to reintroduce, at every stage—from defining price objectives to monitoring commercial policy—the dimension of prior investment (capitalization). The approach seems self-evident. It tackles nothing less than the most troubling paradox of the supposedly triumphant market economy.
Even today, the private enterprise is presented as the basic unit. Yet, almost imperceptibly, the accounting and conceptual apparatus guiding its leaders increasingly overlooks the enterprise’s fundamental trait. Before being an organization or a production unit, it is itself a concentration of markets. Its first market occurs at the moment of its birth. The founding act coincides with the assembly of a certain stock of capital. Often, these contributions occur outside the stock market. This does not change the nature of the operation. Capital providers act in view of an exchange: in return for their initial investment, they expect an indefinite series of profits.
Once founded, the enterprise will hire employees. Another exchange: in return for the services rendered through their work, the employee receives compensation. Further exchanges occur with external suppliers: purchases of equipment, raw materials, or services of all kinds. Michaut rightly emphasizes one more point: the distinction between internal and external suppliers should not be pushed too far. From a strictly economic perspective, it is artificial, as evidenced by the rise of subcontracting. Yet it serves as a key criterion for defining the famous added value. This concept, often hastily considered modern, contributes in its own way to freezing practices, perpetuating a certain feudal and highly hierarchical conception of the firm.
Considered from the outset as a supplier, the employee would cease to be defined—like in labor law—by their subordinate status. Where one least expects it, the market economy reveals its potential for legal and political liberation. Finally, the enterprise, already engaged upstream with capital, labor, and other supplier markets, discovers downstream its own market. With luck and much effort, it will find an outlet for its own products. This crucial aspect is almost exclusively the focus of managerial accounting.
In practice, managerial accounting only knows product flows (credited) and costs (debited). Profit is thus first conceived as a margin on sales flow. This risk relegating to a secondary position the infinitely more crucial and universally recognized concept for the enterprise: its return on capital, i.e., profit relative to invested capital. Partly responsible for this drift—and the dangerously obsessive focus on sales flow, repeatedly denounced but continually resurfacing—is an increasingly poorly managed linkage. The growing divorce between, on one hand, the flows recorded in what was once called the operating account (now consolidated in the income statement) and, on the other, the patrimonial accounts—stocks—on the balance sheet, marks a real betrayal of the spirit of capitalism and its least imperfect expression: double-entry bookkeeping. Moving simultaneously and conspicuously both flow and patrimonial accounts was precisely the reason for its existence.
The explanation of this mutual isolation speaks volumes about the actually moribund character of liberal capitalist economics: commercial accounting is increasingly influenced by the concepts and modes of thought of national accounting. Historically, national accounting was created to serve the war economy. It still reflects this origin: supporting, with statistical approximation, the expedient interventionist measures of state dirigisme (centralized economy) substituted for the subtle mechanisms of the market. By nature, national accounting ignores patrimonial accounts. The underlying reason is that the public economy functions without capital.
Before returning to management, let us briefly consider the stock of capital in light of the renewed debate on payment terms in Brussels. Here is an opportunity to grasp the cause-and-effect relationship between insufficient equity on one hand, and on the other, the dysfunctions of today’s economy, of which unemployment is the gravest. A thesis we have consistently defended in these columns. Equimanagement is its necessary extension.
As is well known, the Fifteen have once again failed to agree on a common regulation. In all countries, including Germany, where cash discipline is one of its great strengths, payment terms are lengthening. Any good management textbook provides the key. In his manual, Georges Depallens examines a company facing cash flow difficulties. It will first seek to reduce, as much as possible, the “work-in-progress” and “operating receivables” items or accelerate their turnover. In doing so, it frees up new liquidity. This exercise has its limits.
The solution is then to take the necessary steps to rebuild a “net working capital, through the use of new permanent capital.” And he adds: “If this is not immediately possible, one should try to extend the payment terms granted by suppliers, either permanently or very temporarily through deferred deadlines (the latter being only an emergency solution…).” Today, many European companies, lacking sufficient capital, rely permanently on such emergency solutions. The average health of European capitalism remains deteriorating. The capital gap of companies cannot be measured directly. Payment delays provide an indirect measure. Insufficient working capital—excess of capital resources over fixed assets—likewise erodes companies’ ability to maintain their workforce. Hence the importance, illustrated by these two examples, of any management method based on rational investment management and, more broadly, capital management.
The technical starting point of equimanagement is the problem of allocating common costs, a problem revisited countless times but never solved. Consider a company producing two products, P1 and P2. The manufacture of each involves direct costs. For indirect costs—those financing the company’s general services—allocation is most often done using physical keys: proportion of units sold, square meters occupied, etc. All of this is arbitrary. Michaut proposes a solution that stands out from all others: it responds to an economic necessity. The idea is to allocate common costs in proportion to direct investments. The company has devoted a certain percentage of its total assets to producing P1 and P2. Unfortunately, as we have seen, managerial accounting focuses almost entirely on flows and pays little attention to balance sheet assets. Filling this gap becomes imperative. The portion of common costs assigned to each product functions like a rent payment: each production center pays the parent company for the share of assets at its disposal.
Why this rule? Because it is the only one that does not distort the return on capital corresponding to each product sold. And this return—not the sales margin, which generally drives a company’s pricing policy—is the decisive ratio. In short, managers must align in advance with the action expected from market competition: the tendency toward equalization of returns on capital across all companies. This will lead them to abandon the false principle of profit maximization. By adopting this method, the enterprise will best ensure its long-term growth (not to mention survival) and the interests of its various stakeholders: shareholders, employees, and, last but not least, its customers.
Paul Fabra