Corporate performance is being evaluated on much more than financial metrics.
When it comes to assessing the health of a company, things have changed in recent years. In particular, it is eminently clear that lenders, investors, analysts and other stakeholders no longer evaluate a company’s performance based solely on its financial statements. Instead, stakeholders in all industries increasingly demand—and receive—access to a growing range of financial and operational information in the form of KPIs. This information is found on company websites, in annual reports and corporate responsibility reports, and in corporate presentations to investors. Stakeholders also look at corporate press releases, speeches, blog posts and a range of other materials from disparate sources.
To be fair, financial KPIs—such as same-store sales, bushels of grain delivered, costs per unit or assets under management—have long been keenly monitored by lenders and investors. Operational, or non-financial KPIs, however—such as employee engagement scores, customer retention rates or greenhouse gas emissions—have not traditionally fallen under the purview of corporate finance teams. There are, however, many strong arguments to enhance the review of this information.
Some finance teams continue to confine the focus of their controls and review processes to financial statements (and, in the case of public companies, quarterly earnings releases and the MD&A). As a result, broader KPIs and operational information that are derived from or appear outside those traditional documents—for example, in a corporate responsibility report—may be unvetted and unreviewed for accuracy of information or consistency of message. Because few reporting processes are as rigorous as those used for financial reporting, the rising reliance on operational or non-financial metrics should cause management to take a closer look at the source of that information before it is published. This is especially true in the age of social media, where information may be released to the public every day (or several times a day) without passing through official channels.
Various strategies exist to mitigate these risks. Adopting a more formal internal vetting process to review operational information could lower the risk of releasing unreliable information to various stakeholders. As the discussion and debate surrounding integrated reporting continues, companies are navigating the benefits and challenges of reframing their external reporting. There are many complexities to consider when combining components of financial reporting, management commentary, governance and remuneration, and corporate responsibility reporting into an accurate, coherent whole. As an initial step, many organizations are turning their attention to these additional sources of information, in order to include them in more formal review and audit processes to better ensure consistency and rigour.
At the same time, finance teams should also begin playing a more instrumental role in helping the organization set up, define, measure and report on operational or non-financial KPIs. In this regard, it helps to keep three key propositions in mind:
1. What gets measured gets attended to.
Action: Organizations use KPIs to guide people's attention to what leadership and key external stakeholders consider important. Action: match your measures to what matters.
2. What gets measured could get gamed.
Action: Many measures are imperfect, meaning they don't always match the intent of what's being measured in a clear easy-to-understand way. They also don't always measure everything that is considered important. Action: think about the risks that your measures could be gamed and mitigate accordingly.
3. What gets measured and compensated gets done.
Action: A great article was written back in 1995 called "On the folly of rewarding A while hoping for B." The title says it all and it is still relevant today. Check that your measures are well aligned with your strategic intent, and that your compensation plans and performance management processes are in fact aligned to those measures.
As the importance of operational and non-financial metrics grows, finance teams will find their mandates extending beyond the more traditional forms of financial reporting and control. By taking steps now to broaden your finance organization's mandate to include all externally reported KPIs and by putting appropriate vetting processes in place, you will provide your organization's board and external stakeholders with greater management assurance on the accuracy of all reports.