Uncovering Erroneous Assumptions

Bartley J. Madden’s recent paper, Management’s Knowing Process and the Theory of Constraints, explores the brain’s capability for forming and re-forming neural circuits that constitute our perceptions of the “world out there.” Our “realities” are built up from specific and limited past experiences.

Managers and boards would do well to be more attuned to uncovering erroneous assumptions as an aid to more successfully dissolving internal conflicts, adapting early to changes in the external environment, and securing competitive advantage. Madden discusses the Theory of Constraints (TOC), as a proven methodology of cause and effect analysis for uncovering erroneous assumptions that can produce highly undesirable effects.

Nurturing a win-win partnership with employees is greatly advanced if management and the board bring themselves to perceive accounting earnings as a result of operations, instead of the means to control their firm’s operations.

The paper draws on Madden’s previous work where he proposed a Shareholder Value Review (SVR) to be part of the firm’s annual report. An SVR would be the responsibility of the board and have three components:

(1) A description of the valuation framework used for corporate decision making, and

(2) consistent with such framework, the display of value‐relevant track records for each of the firm’s major business units, and

(3) consistent with such track records, the board’s discussion about management’s long‐term strategies, reinvestment plans, and the sources of competitive advantage, if any, for their business units.

In general, an SVR would motivate the board to better fulfill their responsibilities for ensuring that firms are on a path of long‐term wealth creation. In particular, SVRs would engage both management and the board in two important areas that suffer from broadly accepted, but faulty assumptions.

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