A railroad begun running between Madison, Ind., and Indianpolis in the late 1830s. The first railroad to operate west of the Alleghenies, it would report net margins rising to 60 percent in 1852. Three quarters of all profits were issued to shareholders as dividends, in an era in which there were no corporate or personal income taxes.

Why worry about histories curiosities like this? Because they underscore the role of good management and good accounting in the life of the corporation. This little railroad would eventually merge, just as most railroads did, in a classic example of consolidation.

Things were different in the accounting reports of the Madison & Indianapolis railroad. Accounts payable was called unfunded debt. Investor’s equity was also classified as debt, resulting in a dramatic overstatement of debt. The railway would also suffer almost comical losses from having no handle on its cash or its cars (60 railroad cars wandered away to other tracks). But its financial statements reflect the philosophy that helped do the company in. It failed to reinvest in the company, helped on by the fact that depreciation was apparently not a recognized accounting concept at that time.

Depreciation underscores a crucial concept—that management must serve the future, not just return profits in the near term. Depreciation sets aside money that will, at least theoretically, be used to replace worn-out equipment. The railroad company artificially held down repair expenses and capital investment, and siphoned off every dollar possible as shareholder dividends. When crunch time came after the boom died, instead of having a sustainable business, the M&I’s revenue dropped and it faced an aging rail system, just as cash flow shrank.

Depreciation represents the need for stewardship.

Stewardship is a key concept (one of many) that got lost in the days of Enron, Tyco and other sordid tales. Top management deserves pay in line with the responsibility and risks required of its position. Of course, Enron and Tyco recorded depreciation, but we’re not really talking about depreciation. We’re talking about the values it embodies.

Executives are not the owners of the company, although many have rich stock holdings, nor are current shareholders the only shareholder constituency. Stock appreciation stems from serving the interests of future shareholders. It’s by serving the future, not just the moment, that management creates true wealth.

A basic business class teaches us that a principal benefit of a corporation is its continuity into perpetuity. Management must plan. It must sustain. It must conserve assets in order to serve current and future shareholders. So the scope of management responsibility goes well beyond what we usually think of. And this is where the Enron and other gangs lost their way. They forgot that their primary role is not one of ownership. It is one of stewardship.

And good stewards have always been hard to find, no matter what the era.

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