Strategy

Nonfinancial Measurements Fall Short

''It takes more than tracking financial performance to properly mind the store.''
Stephen TaubOctober 19, 2004

While the Sarbanes-Oxley Act and other regulatory efforts are aimed squarely at fighting fraud and fostering better internal controls, they miss the mark on nonfinancial measures that could have an equally large impact on a company’s success or failure.

This is one of the main conclusions from a new survey conducted on behalf of Deloitte Touche Tohmatsu by the Economist Intelligence Unit (a sister organization to CFO.com), which polled 249 board members and senior executives at large companies worldwide. The EIU found that four factors that are driving the need to monitor nonfinancial performance indicators: increasing global competition, growing customer influence, greater awareness of reputational risks, and accelerating product innovation.

The report also asserted, however, that “the broader question — are board members, senior managers, and investors really monitoring the right indicators of long-term corporate health? — has remained largely unanswered.” Indeed, although 86 percent of survey respondents believe their companies do an excellent or good job measuring and tracking the performance indicators necessary for financial-reporting purposes, just 34 percent feel that way about how their companies monitor critical nonfinancial indicators.

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“The findings are a warning sign that unethical behavior by a small number of executives is not the only critical issue in corporate governance,” said William G. Parrett, Global CEO of Deloitte, in a statement. “It takes more than tracking financial performance to properly mind the store. And most board members and executives acknowledge that the tools and systems to monitor nonfinancial performance are either underdeveloped or are missing altogether.”

Not that survey respondents don’t have a handle on the measures they’d like to track. Large majorities named many “critical” or “important” drivers of success for their companies that cannot be measured in monetary terms: customer satisfaction, product/service quality, operational performance, employee commitment, governance and management processes, brand strength, innovation, and the quality of relationships with external stakeholders.

Yet fully 48 percent said their company’s nonfinancial metrics were ineffective or highly ineffective in helping the board and the chief executive officer make long-term decisions. And 34 percent said their nonfinancial metrics were ineffective or highly ineffective in helping directors and the CEO with control and compliance matters.

Slight majorities of respondents said that their boards received excellent or good information on the quality of the company’s governance and management processes (65 percent), customer satisfaction (50 percent), product/service quality (49 percent), and brand strength (51 percent). The numbers were somewhat lower for relations with external stakeholders (44 percent), innovation (41 percent), employee commitment (41 percent), and the company’s impact on society and the environment (25 percent).

Few respondents said that their metrics were highly effective in providing an accurate and reliable picture of the company’s financial performance compared with that of its competitors (25 percent), its future prospects (17 percent), how the company is doing in nonfinancial areas, compared with its competitors (8 percent), and the health of current partners and suppliers (6 percent).

Only a small number of respondents said their nonfinancial metrics were highly effective in helping formulate strategy (17 percent), addressing control and compliance issues (13 percent), helping to guide short-term and long-term decision-making (12 percent), and achieving the appropriate valuation in the capital markets (9 percent).