Business has to operate well enough to achieve what it is meant to. For operating activities, this means all the internal business processes has to run productively. To do so, we will have to see through many processes that are going on inside. Processes may differ among business types, in trading companies, this will include warehousing and logistics affairs, but for a service business, it may be inappropriate to do so, since they do not usually have such process. Instead, employee training and certification program can be the substitute of such process. In general, it simply consists of any system that keeps the business up and running well along with the controlling measures that are taken to prevent errors and fraudulent activities. Plomia believes that businesses will have to make a proper system for each of their internal activities to operate well. We usually call this the ‘standard operating procedure’. This, for example, includes the steps of recruiting employees, maintaining good relationships among them, and completing legal affairs related to them. It can also include the quality assurance and control procedure in product developments, productions, or simply in its administrative matters.
For operating activities, the scoring will be focused on the management quality, whether they will be able to survive the adversities in the upcoming future or not. This will be done by identifying signs of persistence and love in the aforementioned subjects, for example, whether the employees are happy and motivated or not, determined by comparing the employee turnover in a month with their productivity level and sometimes by conducting surveys or interviews. The in-depth knowledge about what to be measured, how to interpret, and the full list of activities that are categorised in the operating activities will be uploaded as articles in plomia.com, section Operating Activities. These articles are collections of updated and best practised business knowledge—sometimes including life values—selected by Plomia’s team from reputable sources. Data that are used to score this section will be most likely not provided in detail in the financial report, so analysts are advised to look much beyond the surface.
Good management quality equals to good overall corporate achievements—a persisting and loving organisation are associated with high profitability. This has already proven by Peni and Vähämaa (2012) that find a significant effect of good corporate governance which mitigates the effect of the crisis on banks in the USA. Their stock price is found to be substantially higher in the aftermath than those who did not, and the profitability is kept high above in the middle of the crisis. Although that research uses variables that classified by Plomia as investment activities, the points are exactly the same but with different metrics. In order to know further on why we use different ones, we need to take a look at the work of Chen et al. (2011) who find that simply using such variables, even those which have already been regulated by the OECD (Organisation for Economic Cooperation and Development) are not enough, especially for firms with too high or low concentration of ownership—mostly in developing countries like in Asia or equivalent to small businesses. This is because there are tendencies of reducing objectivities in such situation. Earlier research from Klapper and Love (2002) of The World Bank’s Development Research Group, confirmed this. They found that it is more likely to happen in countries that have low investor protection—weak legal environments—thus the importance of good governance is significant there. Even though companies are unable to create a good legal environment by themselves without the help of the government, they suggest that companies can still make protection provisions to prevent misuse of assets and improve their performance and valuations. This can alternatively be recognised as applying sufficiently functioning internal control.
When the topic extends to internal control, it will surely relate to audit procedures, legal contexts, and fraud. Fraud happens as a result in lack of control and inappropriate goals which will induce pressure and rationalisation—this is called the fraud triangle theory by Donald Cressey, another classical fraud theory is the fraud diamond theory which adds “capacity” to the previous model (Abdullahi et al., 2015). Internal aspects such as expenses are one of the most easily affected aspects from lack of controls. Unattended budget allocation procedure will almost surely increase expenses and trigger unfavourable changes. Other external factors like force majeure or governmental regulatory agendas may also cause this change. But businesses that apply good systems tend to recover from those adversities quickly, since they have usually been planned carefully, stress-tested sufficiently, and have decent backup plans which indicate the persistence and love in the creation of it. That is why in order to make a relevant scoring method in operating activities, we should not stop only at visible performance measurements (numbers). We have to go much deeper beyond the system, to the controlling powers behind it, through any subtle signs we can find, just like a detective while sticking to rule of thumb—the core values and purposes of the system itself.
In our framework, we define a good system as a procedure that can simultaneously minimise engagements of managers, maintain productivity, and prevent fraud. A persisting and loving culture in a system can be identified through the people who operate in it, whether they are able to maintain their productivity independently (motivated enough) and care for the business by maintaining a loyal attitude which negatively related with fraudulent activities. Unique techniques will mostly be involved to derive relevant results for this aspect—a combination of crime-like investigation method according to the availability of the data: qualitative data such as interviews, data transformation or identification techniques to uncover obscure facts, and series of quantitative tests. In general, we can safely assume that there is enough persistence and love inside the operations if businesses stay productive and fraudulent free for a long time, without much dependence on the manager’s active decision. But why do we have to minimise the manager’s engagements?
Chamorro-Premuzic (2019) enlighten us so much about a very interesting yet so commonly found leadership problem for this era: incompetencies. This is one of the main reasons why we should not rely on one’s gut, no matter how professional and competent he or she looks. It is because all of us can easily become a victim of very misleading traits such as overconfidence, which, unfortunately, is commonly perceived as competence, although there is actually a negative correlation between those two. Even if we escaped this incompetency trap, there are still tons of other fallacy traps out there—yes we exaggerate that if you notice, of course, there can’t be ‘tons’ of fallacies, but yes there are so many of them, and this shows you that even words can easily and irrationally be skipped by our brains in the name of ‘idioms’—that cling to our ‘normal’ human preconceptions that can affect our decision-making capabilities. All of those can put businesses in miserable conditions (). That is what we are trying to evade, by minimising engagement of leaders (managers) from general operating activities, instead, we propose a more data-driven approach using measurable KPIs and criteria for every cases—even in the event of electing the leaders themselves—just like what Chamorro-Premuzic also suggested in his book. But as risky as it sounds, engagements, by contrast, have a totally opposite impression in our next activities.