One of the smartest and most interesting accountants I know is Tony Rose from Rose, Snyder & Jacobs in Los Angeles. He goes way past the numbers with his clients and today we’re going to spend some time talking with him about the areas where you have capital and it might not be around the Benjamins.
Tony is what I call a values led accountant. This means that he doesn’t start with your financial assets. He starts with the values you have and how they fit into your life. From there it’s much easier to put together plans that not only help you work on financial assets but others as well.
The five levels of capital we’ll talk about today are:
- Human capital
- Intellectual capital
- Social capital
- Structural capital
- And of course financial capital
Transcript:
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.
Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, guys. How are you today? This is Josh Patrick. You’re at The Sustainable Business.
Today, you are in for a really big treat. Now, I’m going to repeat that, as in a really big treat. We have Tony Rose with us.
I met Tony—gosh, I don’t know, probably 13, 14 or 15 years ago with a fellow named Scott Fithian in Legacy. Now, Tony is a CPA. And if you ever heard me talk about CPAs, I’m not especially complementary most of time. Today, is the exception to my rule. I would have to say, Tony is likely the most interesting CPA I’ve ever met and probably the most interesting CPA you’re ever going to have a chance to listen to.
So, instead of me yammering on about how great Tony is, we’ll let him speak for himself.
Hey, Tony, how are you today?
Tony: I’m great, Josh. I’m now embarrassed, breathless and I’m totally red.
Josh: Well, I’m actually looking at you. You don’t look all that red. You look like a normal person to me so.
Tony: Yeah. The color of my camera is very faded.
Josh: Oh, okay, so that must be it.
So at any rate, you’ve written a really interesting book we just spent a few minutes talking about called Five Eyes on the Fence. So, what are the five eyes and why should we care about them?
Tony: Let me start with saying that accountants think mostly that the world is about money and making money. And that doesn’t account for why people fail, why they’re unhappy, why businesses fail, why they flounder. And so, I have been searching for many years to try to figure out what was the equation.
And John Hughes, who you know very well, who writes a lot about family governance, identified something called human capital as something of value owned by a family and a family business. So, I was wondering, “How do you measure that?” And as I started thinking about things, I realized that people owned a lot more things than just money. They owned who they were as people. Of course, human capital. They owned what they knew, their intellectual property. They owned who they knew, the social relationships they had. And they owned how they did things, structural capital. And so, I started exploring that and I wrote this book Five Eyes on the Fence because I believe that you need to keep five eyes on those five elements for you to be sustainably successful and grow.
Josh: Let’s talk about each one of these five different capitals. But let’s put financial capital last because my assumption is that financial capital is actually a result of doing a good job with the other four capitals.
Tony: That’s exactly correct. In fact, when you look at these young tech firms – digital media firms that are given huge amounts of money by investment bankers, they’re given money but they’re not structured necessarily in ways that the money won’t just drain out. On the other hand, when you take companies like Microsoft et cetera they actually had all these other stuff going for them and the money came out. It came out like you’d squeeze a sponge. So you have to take care of all four.
Josh: Okay. So, how you go about – for example human capital, how do you take care of human capital?
Tony: I tried to figure how you measure it. If money is measured, the currency is dollars or euros. I tried to understand “How do you quantify what human capital is?” And I came up with three things. And I’m going to be coming up with more in the future.
(1) I’m a big believer in Kathy Kolbe’s called the Kolbe Index which talks about instincts. When you think about the three parts of the mind, you’re thinking, you’re feeling and then you have to do. And the Kolbe Index shows you how you do things. So, you can measure someone by how they do things when they’re free to do it the way they want to.
(2) The second concept, I believe, is Howard Gardner’s concepts of multiple intelligences. I think people are smart in many, many different ways. And in fact, some of our greatest entrepreneurs were thought of as terrible students but they had other kinds of intelligences like intrapersonal intelligence, interpersonal intelligence, spatial et cetera.
(3) Third, social relationships, I believe that maybe the most important asset anyone has is the contacts and relationships they have. I am sitting here today because when I got fired from my first accounting job, which by the way I deserve to be fired, I called a professor of mine who I had a very casual relationship with and it set the rest of my life at 40 years. So, I say to students, when I talk to the students, “When you’re looking at a barista, smile at them. When you walk by someone down the hall, don’t look down, look at them, engage them because you never know when that person’s going to be the rest of your life.
(4) And finally, structural capital, we do things over and over again, get disappointing results and we do it anyway. There are things that we do that work for us. There’s things that we do that don’t work for us and understanding the difference between the two is so important. Companies that have great structures but structures around the wrong thing fail. You have to have the right structures built for the right things that are important for your company. I’ll bet you do that a lot with your clients.
Josh: We try.
So, talk to to me a little about the right structure versus the wrong structure.
Tony: My partner, Eric Swenson says, “one size fits one”. Every company does things a little differently. So, I believe you can have the same product, the same demographic of customers but if you deliver it in a different way, you’re bringing a different kind of value. And after all, when we own a company it’s about bringing the value to the customer that consumes your product, whether it’s a service business or whether it’s vending machine business. They have to see the value. It’s not enough that you see the value. They vote with their dollars.
Josh: Right.
Tony: If you can’t get that value to the client properly then you’re done. I’ll give you a very, very quick example. I flew in an intercontinental flight on American Airlines and the ones that go trans-Pacific and trans-Atlantic, those flights have switched out their wi-fi to Panasonic Avion from Gogo inflight.
The Panasonic Avion doesn’t work well. It’s really actually pretty awful and I bought $12-worth of wi‑fi. It didn’t work so I wrote them, I said , “you know, this doesn’t work”. I heard within three hours from them and they said they’re sorry. They arranged a credit for me.
Do you think I’m going to try a Panasonic Avion again? You bet I am because they stood behind their product. So, even though their product was a bit deficient, I’m willing to give them another chance. Same as like customer service, how you approach your client is part of your structure. And they are structured very well. I hope someone from Panasonic is listening to this.
Josh: Well, likely not, but you can send them a tweet when it goes live, how’s that?
Tony: They’d be much supportive for it – for not listening to you.
Josh: So, if a business only has two things, you say you’re leaking financial capital, what does that mean?
Tony: If you’re creating value, you have to have the knowledge – there’s three parts of the mind, right? You have to have the intellectual property [inaudible 00:08:02]. You have to have the relationships to be able to have someone be an advocate for you or want to consume what you do. And you have to have the way to do it. Plus, you can’t be a crumbum.
People only will tolerate dealing with awful people for so long. I believe that you could be a crumbum but if you have the great intellectual capital, you have a way to get it to them properly and you have the social relationships with people that continue – a bond. Even though you’re a hateful person, you actually can probably do okay. But if you’re missing one of those other three elements, you’re not going to make money.
Josh: Yeah. And I think if you’re a crumbum you eventually run out of people you can screw, so.
Tony: Oh, that’s true. That’s true.
I do a values exercise with college students. That’s really incredible because I believe even college students own a lot of stuff of great value. And I tried to point out to them that they have their relationships the way they do things, what they know. And their value set which I believe is the bedrock by where we make all of our decisions, that’s very valuable. And when you screw that up, I think about Ryan Lochte who’s missing, I think, at least two although he’s still dancing with the stars, I think. You leak money. You leak money.
Josh: We talk a lot about the concept of the brilliant jerk.
Tony: Oh, I like that. Can I steal that?
Josh: Yeah, please do. I didn’t invent it. Somebody else did but I forgot who.
But the brilliant jerk – essentially, we’ve all had him in our companies and we’ve all got to a point where we couldn’t take it anymore and had to fire him.
Tony: Sure.
Josh: And when we do, what happens? You have 19 people coming up to you saying, “Gee, Tony, what took you so long?”
Tony: I don’t disagree with that.
Josh: It happens to me a lot, so I think we all pay a big price when you deal with jerks but that’s just my own.
Tony: I agree.
Josh: Maybe I’m too old. I can’t handle it anymore.
Tony: So maybe, if you compare this to the trusted advisor formula of David Maister which I know you know very well.
Josh: Yes.
Tony: If you have someone that’s really self-oriented, very selfish – stuff like that, that can supersede everything else.
Josh: Yes, it can. And frankly, there’s another great book which I’m going to assume [inaudible 00:10:17] called business at The Speed of Trust. And in there, they talk about if you have a trusting relationship, things go a lot faster and a lot more effectively than you have an untrusting relationship. So I know that when I’m in the business relationship and things aren’t going well, I always look at Maister’s trust formula.
Tony: And I agree with that.
An interesting thing is that I’ve seen, in my life, many business owners bring people around them that they trust but don’t have any of the other referability standards. They’re not terribly knowledgeable and are not very reliable. And still, they hang around. And so, the combination of trusting someone and a perception that they don’t have self-orientation involved can actually almost get in the way of corrective action that you know has to happen for someone. And that’s because people don’t pay attention to the structure. They see things are not working and they attribute it to something other than the way they go about solving their problems. And that’s a structure too.
Josh: Yeah. That’s an interesting point. So, let’s talk about that for a second. You’ve got this structural issue that comes in which is your belief system and your values, and when you’re working with your clients, how do you get them to take their personal values and make sure they manifest properly in their business?
Tony: (1) I think you have to get them to notice that they actually are deploying values as they make their decisions. So, we have that old legacy value part. So I’m sure you’ve seen them, the 46 value words. We ask them to go through an exercise where they identify their most important values. We talk about the importance of values. So that’s #1. You’ve got to notice.
(2) You have to understand how they influence, both positively and negatively, business decisions that you make. We had a client that in the late ‘80s when, during there’s a big real estate depression, they ran through all their money, so what they had left was about 40,000 acres of land. That came from a value of taking care of their employees. And they were able to outlast it because no one wanted to see them fail. But they needed to understand that the value of taking care of their employees was going to threaten them in other ways and they needed to worry about that.
So, (1) you have to identify the values. (2) You have to understand how they interplay in regards to decision making. And then you need sometimes help to have someone with an imposing view and maybe a different set of values and hear what they have to say because they might bring a new reflection on the values that you want to employ. And what you need to do is listen – especially the people that you hire to help you. And a lot of people hire people and they think that’s how things are going to work. But in reality, they hire people so they don’t have to listen.
Josh: That is probably more true with second-generation business owners than first-generation business owners—
Tony: Agreed.
Josh: In my experience.
And since you agree, let’s find out if we have the same reason for this. What’s your reason that you think that happens with second generations?
Tony: (1) Most original owners have needed help and mentorship and/or collaboration to get where they are. They know that they couldn’t do it alone. Very few people do it alone
Second generation people have observed their first generation doing their thing but oftentimes it’s a little late in the game, so they never saw that original collaboration, the original dependence, or they mistook the characteristics of what that first generation was as being characteristics that they should emulate. So, they might see the wrong characteristics and emulate the wrong characteristics. So they look like bad copies of the first generation instead of being their own people. And I think that’s really important.
In fact, I don’t know if you’ve noticed that Kathy Kolbe and Amy Bruske of the Kolbe group are in a process of publishing a book called Business is Business. And it talks specifically about family businesses and that kind of issue where you’re superimposing the first generation on the second generation and it’s not a good fit. It’s a wrong coat for the right body.
Josh: Kay Hughes calls that the black hole of the founder where they suck their family into this black hole and require that the second generation or the rising generation adopts the value system of the patriarch, usually. It could be the matriarch but it’s usually a patriarch in that. And I just find that a really interesting thing.
Tony: Actually, what I said is not dissimilar but you just said it more economically.
Josh: Actually, I have a different reason for what I think second generations have a different belief. And the reason is the first generation. To get a business started and off the ground, it takes a ridiculous amount of hard work. And it takes a personality that has to be very, very tough to deal with a lot of adversity that you don’t see once a business has 25, 100, 200 employees. So, the challenge comes as that first generation is very tough but they don’t turn the toughness off when they go home. They keep that toughness going. And as a result, the second generation, when they get a chance to run the business, they don’t want to hear it from anybody. If you don’t agree with them they’re firing you.
Tony: That’s interesting. I would have a slight variant on your assertion. I think, often times, the tough guy goes home and might be tough or, on the opposite pole, might be incredibly permissive because they work so hard to make life easy. They want it to be easy at home. And so, they don’t teach hard to that second generation.
Josh: Interesting. I have to think about that. I’ll have to think about that.
We have time to talk about one more thing, Tony, then we’re going to have to end it for the day. We probably could go for hours but we just don’t have that much time.
So, let’s talk about silos and why silos are a bad thing. So, first of all, can you explain what a silo is, and then why is it bad, and then we’ll end it there. How is that?
Tony: Frankly, I talk about silos a lot, in a lot of different ways. Let me relate it to the Five Eyes on the Fence. Some people work on their businesses without looking at the interrelationship between all the different capitals. But it’s really like guacamole, once you hit something, it’s going to have a reaction elsewhere.
So I think years ago, Netflix raised its price. I think it was Netflix. Raised its pricing because they needed more money and it wasn’t a profitable thing. And they ended up losing 600,000 subscribers, I believe, because they didn’t think about how to communicate with their constituency in ways that would make them feel not taken advantage of. So you can do something financially, or something about your structure, or something about your relationships with your vendors without there being other reactions and you need to think about the reactions throughout all the five capitals.
That’s basically what I mean by silos. You can’t just work on one thing in your business without thinking about how it’s going to affect other stuff. A lot of people do that. That’s unfortunate.
Josh: It is unfortunate. And silos, in my experience, in your business, outside your business with advisors, wherever you’re siloing – stop it.
Tony: Yes.
Josh: Learn the word collaboration and stop being an island unto yourself.
Tony: Yes.
Josh: So, if you do that, you’re likely to be more successful.
And Tony, unfortunately, we are out of time. I’m going to bet some of our listeners are going to want to get in touch with you. And if they did, how would they go about doing that?
Tony: There’s two ways you can do that. You can contact me directly at trose@rsjcpa.com or just go to rsjcpa.com. We have a thought center. If you want to hear more of what I’m thinking, it’s right there.
Josh: Cool.
Tony, thanks so much for your time today. I really appreciate it.
And for are those who are still listening with us, I have an offer for you also. We made a free – and this is free, 1-hour audio CD. It’s an audio CD course on how to take a successful business and move it to one that’s truly sustainable which means it’ll last past you.
To get this free audio CD is really easy. Take out your smartphone, put your text application and text the word SUSTAINABLE to 44222. That’s the word SUSTAINABLE to 4422. You’ll get a link. Click the link. Give us your address and we’ll have that audio CD on its way to you really soon.
So, thanks a lot for being with us. You’ve been at the Sustainable Business. This is Josh Patrick and I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at jpatrick@askjoshpatrick.com.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.
I read this article and Here is very thoughtful discussion between Tony and Josh. Thanks both of you!