RONA or "Return on Net Assets" was a bit of accounting sleight of hand or misdirection introduced to Boeing in 1998 by Deborah Chase Hopkins. At best, it is flawed thinking about accounting and its limitations. At worst, it is a deliberate attempt to confuse and conceal.
How one chooses to think about what Debbie did depends on how much credit one is willing to give her. Was she a very smart person who knew exactly what she was doing, or was she merely a bit confused? Maybe she had fallen into a logical fallacy and didn't understand some of the basics. I personally think she was a very smart cookie who knew exactly what she was doing, but then that's my Jane Marple take on things again. Maybe I'm being too severe. My readers can decide for themselves.
Let's start with some accounting basics. Modern double entry bookkeeping, which is the foundation of all GAAP and governmental accounting, evolved in the city states of northern Italy in the early Renaissance.
The first formal description of modern accounting was written by the most renown mathematician of his day, Luca Pacioli, who was also a good "friend" of Michelangelo, who was much younger. Pacioli's accounting text is in the ninth chapter of his famous book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.
In his book, Pacioli laid out the equation that is the basis of all modern accounting:
Assets = Liabilities + Equities
As with any equation having multiple variables, it is possible to restate it such that any one variable is isolated and shown as a function of the others. Thus, Pacioli's equation can be stated in two more ways:
Subtracting Equities from both sides of the equation gives us:
Liabilities = Assets - Equities.
Subtracting Liabilities from both sides yields:
Equities = Assets - Liabilities.
Looking at both of these restatements of Pacioli, it is obvious that we have two very different and equally valid types of "net assets." So what was Debbie talking about, and why? Clearly, she had no interest in the return on the liabilities, so why leave it vague and not simply say "return on equities?" Why try to make it obscure by not simply saying what she meant? Maybe she wanted a term that sounded new and cool. Maybe she wanted to spin a 500 year old idea such that it sounded like something brand new.
Then there is that whole problem about the limitations of accounting and the fact that the financial statement assets that have assigned numerical valuations are not all of the assets of a firm, nor often are they the most valuable ones. There is an interesting quote along this line attributed to Alfred P. Sloan, the founder of General Motors, and perhaps more notably, the sponsor of the research work of Peter F. Drucker at GM and of Douglas McGregor through his fellowship program at MIT. According to Thomas Bateman and Scott Snell on page 276 of their 1996 book Management: Building Competitive Advantage Sloan once said: "Take my assets - but leave my organization and in five years I'll have it all back." Clearly, Sloan was making the distinction between accounting assets and those that are not included in Debbie Hopkins' obfuscating notion of "net assets."
Why do I say "obfuscating?" Well, if you want to dampen what seems to be a very damaging near term focus on what the stockholders are getting as returns instead of both competing effectively with current operations and investing such that the firm can also thrive in the future, then shifting at least part of everyone's attention away from that and toward something else, such as the firm's assets, might be helpful. It might even make it seem like a good idea when you start selling off the resources that are needed for strategic purposes. Of course, one would have be both clever and intentional for the term RONA to have been used for this purpose. Was Debbie clever and intentional?
There is one other possibility for what motivated Debbie's RONA dog and pony show. This one is also consistent with a Jane Marple view of the world. Maybe she really didn't care about Boeing at all, short or long term. And maybe she didn't care what Harry Stonecipher (the guy who hired her) was trying to accomplish in setting up the 787 and the 20xx Programs for failure. Maybe her intention was to be a short termer from day one, and all she ever intended to do was play a tune that matched precisely what Harry wanted on his playlist. That fits with the data as well. Or maybe it was some mix of this and intentional participation in Harry's plan. Either way, she was well paid for playing her part. Her pay package gave her a $0.75 million signing bonus, $0.81 million in her first year's salary, and a potential $2.0 million in bonuses tied to the stock price. During her second year she got a total package of $1.2 million. Then she left for Lucent, where she lasted only one year before getting the ax. Maybe the RONA schtick wasn't as appealing to them, or maybe one of their accountant's explained it to her new boss, whatever. She kept landing on her feet with well paid regular jobs and board positions, just for spinning a 500 year old bit of nonsense.
Of course the huge downside for any company that starts obsessing about its assets, when thinking about its stock price, is the self inflicted wounds that are possible by unloading things with no consideration toward long term planning. This can be the case whether the assets that get identified for divestiture are the financial assets as reflected on the balance sheet, or off-the-books assets which are actually owned.
An example of off an off-the-books asset that is none-the-less something that is both very real and very much owned is something that is fully depreciated, but still has a material value because it is something that could be sold, or is still being used in current operations, or is a part of available capacity for future needs. If one is nudged into short term thinking in a business with long life cycle products, which is what happened at Boeing, then one might be seriously tempted to pump up the ratio (equities to assets) by selling off those assets, thus doing serious harm to a company's long range planning options. And of course, at least some of that sort of short term thinking about owned assets happened during Debbie Hopkins' brief tenure at Boeing. What was the long term impact of that sort of thing? That is impossible to calculate. The last lines from Robert Frost's poem The Road Not Taken is in order at this point:
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
One thing for sure, Debbie didn't let any moss grow on her backside at Boeing. She was in and out as CFO in only two years. It was just a stepping stone to her, and not a very attractive one. Given that this is the same period when the 20xx plan was being finalized, and the resource decisions were being made for airplane #1 of that plan, one might conclude that just maybe she recognized that leadership was posturing their commitment to the program's failure just as it was beginning. Again, that would take a clever perceptive person who was fully aware of what was happening, and perhaps even being paid to help out in any way she could What would Jane Marple think?
Like I said at the start of this section, I choose to think of Debbie as one smart cookie and not someone who was clueless about the stuff she rattled on about. Anyone reading this can decide for themselves.
Minor footnote: The Wikipedia article on balance sheet has a persisting error in it. I'm not sure why, but the first sentence includes government as one of the examples of the kinds of entities that have balance sheets. This is actually the primary departure from GAAP for governmental accounting. Many, if not most of the assets of a government are impossible to properly value, and trying to generate a meaningful total for them is pointless. What is the value of Yellowstone Park? That's an absurd question on its face. So there's no point in generating a balance sheet in governmental accounting. Pacioli's double entry system is used for the funds, and they in turn are closed against approved budgets, which typically are tied to legislatively approved amounts, and a supporting revenue plan. But, closing to a balance sheet - not so much.