Executive Summary
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Traditional measures of performance are of limited use to modern businesses, being rooted in evaluating past performance. They are a poor guide to true value, often missing the key factors that promote long-term worth.
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It is essential to include the leading financial and nonfinancial indicators of performance that drive long-term value. This provides broader and more sophisticated information that highlights future trends.
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Effectively managing and communicating a broader set of performance measures reduces uncertainty, ensures better relationships with stockholders and analysts, and enables improved financial performance.
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Full accountability and disclosure, combined with improved measures and new systems to drive the process throughout the organization, create greater value for stakeholders, promoting future success.
Introduction
Improved governance requires the right employees, the right culture and values, and the right systems, information, and decision-making. Unfortunately, most organizations are attempting to steer their information-age businesses using industrial-age measurements. Managers have struggled for decades with accounting systems that fail to measure many of the variables that drive long-term value. The historical lagging indicators of performance that are commonly used by accountants are of limited value in determining the value of businesses for external stakeholders, and are of little use in guiding the business internally. Financial data on profitability and return on investment are valuable measures of corporate performance, but they are lagging indicators that measure past performance. A broader set of financial measures is necessary (for example, measurement of intangible assets such as intellectual capital and research-and-development value), in addition to an expanded set relating to customers, internal processes, and organizational measures.
The metrics must include the leading financial and nonfinancial indicators of performance that are the drivers and predictors of future financial performance. For example, fines and penalties may be a leading indicator of corporate reputation, employee turnover is a leading measure of future recruitment and training costs, and product quality is a leading measure of customer satisfaction, which in turn is a leading measure of market share. Each of these factors (reputation, employee-related costs, customer satisfaction, and market share) impacts financial performance.
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