Haute Lumière

Commerce · VII.11 · MMXXVI · daylight

La Bourse  /  Volume VII  /  Nº VII.11  /  Workbook — the executive

WORKBOOK — THE EXECUTIVE

Chapter VII.11 · What We Owe the Next Thing

For the person with a P&L, a board, a set of auditors and a finance function that has heard enough about the long term. This workbook does not ask you to care more. It asks you to produce one page your competitors cannot produce, at a cost of about four analyst-weeks, and shows you where your own numbers already support it.

---

THE PROPOSITION, IN THE LANGUAGE OF THE FIRM

You are already running an intergenerational balance sheet. You publish parts of it every year: the fixed asset register, the pension scheme note, the net debt position, the decommissioning provision, the impairment tests. What you do not publish — what nobody publishes — is the consolidated per-unit position across all of them at once, and the one parameter that decides its sign.

The business case is not ethical. It is three commercial facts.

One: your cost of capital already prices this and prices it badly. Lenders and rating agencies are applying an implicit substitutability assumption to your firm because you have not stated an explicit one. An implicit assumption is always conservative, because the person making it carries the downside and none of the upside.

Two: the disclosure regimes are converging on the account and not on the narrative. Everything that has happened in sustainability reporting over the last decade has moved in one direction: from statements towards balance-sheet items with named methods and named verifiers. A firm that has already built a consolidated per-unit account is ahead of a requirement rather than behind one, and being ahead of a requirement is worth real basis points at exactly the moment everyone else is scrambling.

Three: it is cheap. The UK-scale version of this account costs about £0.0047 per person per year to verify. At the scale of a firm, it is four analyst-weeks for the first edition and about one for each one after.

---

PART ONE — DISCOVERY

What your own numbers already support

Exercise 1.1 — The five lines, from your own statements (one day)

Pull them from documents you have already published. Do not commission anything.

Then divide each by the same denominator. Per employee works for a services firm; per tonne, per hectare or per unit of output works better for anything extractive or industrial; per share works for the equity story. Choose one and hold it, because the whole value of the exercise is that seven numbers become comparable for the first time.

Exercise 1.2 — The consolidation (half a day)

For each liability, ask the two-sided question: who holds the matching asset, and are they inside or outside the boundary? Intercompany debt nets. A funded pension scheme's liability is matched by its assets and the net position is what crosses the boundary. A supplier prepayment is somebody's receivable.

The UK sovereign version of this move is the cleanest teaching case: of £39,941 per head of public debt, £11,183 is external and £28,757 is one Briton's claim on another. Roughly three-quarters of the most-quoted intergenerational liability in British public life is internal. Find the equivalent in your own numbers and you will usually find it is a larger proportion than the board believes.

Exercise 1.3 — The rate-sensitivity audit (half a day)

Take your pension note and find the movement attributable to the discount rate alone. The UK Whole of Government Accounts moved from £2,631 bn to £1,375 bn in twelve months — £1,256 bn, about £18,580 a head — without one pension promise being changed.

Compute the same ratio for your scheme, and put it on one line. That line is the most useful piece of risk disclosure most firms could add this year, and it costs nothing because the number is already in your actuary's report.

---

PART TWO — THE ARITHMETIC

The account, and the parameter that decides its sign

Exercise 2.1 — ΔM for the firm (two days)

Take your net operating assets per unit at two points a generation apart — or, if the firm is younger, at founding and now — and deflate. You are asking: is the productive endowment per unit larger than the one this management inherited?

Run the UK national version first as a method check: £174,556 now against £90,276 then in constant prices, a delta of £84,280 per head and a compound real rate of 2.47 percent a year.

Then apply the discipline that makes the number usable: move the earlier figure by ±20 percent and see whether your conclusion survives. The UK's does — ΔM runs from £66,225 to £102,336 and never changes sign. If yours does not survive, you have learned something more valuable than the original number.

Exercise 2.2 — The revaluation switch (one day)

This is the corporate form of the chapter's land switch, and it is where boards most often flatter themselves. Separate, explicitly:

• capital formation — new productive capacity built;
• revaluation — the same assets marked at a higher price.

In the UK national accounts the second is 78.2 percent of the headline transfer. In a property-heavy, land-heavy or brand-heavy firm it can be more. Report both. A board that cannot see the split is measuring the market, not the management.

Exercise 2.3 — ΔN and the UNMEASURED register (two days)

Price what you can and register what you cannot.

Cumulative emissions over the period, at three carbon values, not one: the UK figure is 15.64 GtCO₂e, which at £269 a tonne is £62,228 per head, at £120 is £27,760, at £50 is £11,567 and at the government's own 2050 value of £378 is £87,443. Use your own internal carbon price as one of the three and say so — that is a disclosure in itself.

Then the register. Every natural stock the firm draws on that you cannot price: name it, name the unit it would be measured in, and write UNMEASURED. Do not write zero. A zero is a claim; the register is a statement about evidence, and an auditor can tell the difference even when a reader cannot.

Exercise 2.4 — θ* and the board table (half a day)

        IGBS(θ) = ΔN + θ · ΔM          θ*  =  −ΔN / ΔM

Compute θ including and excluding revaluation, at each carbon value. Build the four cells. The UK's are +£22,052, −£62,228, −£43,863 and −£62,228; θ is 0.74 with land and 3.39 without; and θ* reaches 1 at £364 a tonne with land and £79 a tonne without.

Then do the thing that makes this a governance instrument rather than a report. Put θ on one slide and ask the board a single question: is our working assumption about substitutability above or below this number?* You will discover that the board has never been asked, that its members disagree, and that they have been voting on capital allocation for years on the strength of an unexamined answer. That meeting is the deliverable.

---

PART THREE — THE BOARD PAPER

Exercise 3.1 — Write it. Six pages, no appendix (two days)

1. The consolidated position, per unit, one table, seven lines.
2. ΔM, with the ±20 percent sensitivity, and the revaluation split shown.
3. ΔN, at three carbon values, explicitly a lower bound, with the UNMEASURED register beside it.
4. θ\* and the four cells.
5. The decision asked for: adopt a working θ, publish it, and commit to the account annually. Nothing else. Do not ask for capital in the same paper.
6. What this costs and what it buys, in basis points, not in adjectives.

Exercise 3.2 — The pre-mortem (90 minutes)

Before it goes: assume it failed and write why. The four standard causes, from the chapter, are that the producer picked θ quietly, that the unmeasured term was set to zero, that the account was used as a score, and that the schedule question was never asked. Each of the four is prevented by disclosure. Say in the paper which of the four you are most at risk of and how you have closed it.

Exercise 3.3 — The instrument (one day)

Take the covenant bond structure from the chapter to your relationship bank's sustainable finance desk. On a $2,000 m ten-year note at 5.00 percent, a 25 bp two-way step is $5.0 m a year, $50.0 m undiscounted, and $38.6 m in present value; a 15 bp step on Uruguay's model is $23.2 m. Verification at $400 k a year is $3.1 m in present value, leaving the covenant net-positive at $35.5 m.

Say the honest negative before the analyst does. That step is 0.0022 percent of the £1,400 bn the UK's own Climate Change Committee puts on net zero to 2050. The instrument finances nothing. What it buys is a priced, dated, externally verified commitment to publish a number that does not currently exist anywhere. Sell it as that and it is cheap and defensible. Sell it as climate finance and the first analyst who divides two numbers will not read page two.

---

THE FIRST NINETY DAYS, AS A BUSINESS UNIT WOULD RUN IT

Four analyst-weeks, spread across a quarter, with a named owner and an artifact at every checkpoint. Nothing here needs new capital and nothing needs a mandate you do not already have.

The one checkpoint that cannot be skipped is day 81. The account must be read by somebody who did not build it and who has an interest in finding the quiet switch. This is not review and it does not block anything — the paper goes either way — but every serious error in this class of work is invisible to its author, because the author is the one person who cannot see the choice they made without noticing they were choosing.

Budget. Four analyst-weeks for the first edition, about one for each subsequent year, plus verification. At the sovereign scale verification runs about $400 k a year and is $3.1 m in present value over a ten-year term; at the scale of a single firm it is a line item in the existing internal audit plan and frequently costs nothing incremental at all.

What you will actually find, based on what everyone finds. Three things, in this order: that a larger share of your headline liabilities is internal to the boundary than the board believes; that a larger share of your asset growth is revaluation than the board believes; and that nobody — including you — has ever stated the substitutability assumption on which the last several years of capital allocation silently rested. The third of those is the finding. The first two are what make the room willing to hear it.

---

WHERE YOUR OWN NUMBERS ALREADY SUPPORT THE MOVE

Five places, all of them inside documents you have already signed.

1. Useful economic life. Your auditors revisit it annually. An asset whose productive capacity is rising should not be depreciating on a schedule that assumes it is falling. This is not an ESG conversation; it is an accounting estimate conversation, and it is one they have every year.
2. The pension discount rate. You already disclose the sensitivity. You are one line from disclosing what it did to the liability in cash terms, which is what the reader wanted.
3. Decommissioning and restoration provisions. These are already a priced natural-capital liability sitting on your balance sheet. You are not opening a new category; you are consolidating one you have carried for years.
4. Your internal carbon price. If you have one, you have already declared a θ-adjacent parameter and simply not named it as such.
5. The maturity ladder. You already know which of your obligations are external. The consolidation in Exercise 1.2 is three hours of work on a table your treasurer refreshes monthly.

---

SELF-ASSESSMENT — for the executive and the finance function together

---

THE ONE THING TO TAKE INTO THE NEXT MEETING

Not the account. θ\*.

A single number, on the front page, that says exactly what a person would have to believe for this firm's position to be positive. It ends the category of argument in which everyone agrees on the figures and disagrees completely without being able to say why — and it does it without asking anybody to change their mind, which is why it survives a change of chief executive.

If θ is below your board's working assumption, you have a disclosure that strengthens your credit story and you should publish it. If θ is above 1, no belief anyone in the room holds clears the ledger — and that is not a reason to withhold the account. It is the reason the account exists, and a firm that publishes it first will be treated as the one that understood the problem rather than the one that had it.