The board members and executives of many companies are more aware of the value of non-financial performance measures, despite the fact that their ability to monitor these factors remains inadequate, according to research published by Deloitte Touche Tohmatsu.
Deloitte found that 78% of CEOs surveyed felt that financial indicators alone do not adequately capture their company's strengths and weaknesses. But while those surveyed admitted they need information on non-financial performance indicators, their ability to monitor them is considered inadequate.
Reality check needed
The survey revealed a critical disconnect between rhetoric and reality in the boardrooms and management circles of some of the world's leading companies, according to Deloitte's CEO, William G Parrett: "The attitudes of CEOs toward understanding the value of non-financial indicators and measuring performance against them are more positive now compared to the last survey (in 2004), but it seems executives and boards are not yet prepared to take the next step and act."
The majority of CEOs said that their company is under increasing pressure to measure these indicators, but that the quality of non-financial performance information they receive is simply not enough to meet that need. Most (83%) said that the market itself is increasingly emphasizing non-financial performance measures.
Major performance drivers
But a growing number of companies are creating significant value by understanding their underlying performance drivers through the use of non-financial measurements. Customer satisfaction, innovation and employee commitment were identified as key drivers of performance among the CEOs interviewed.
Despite the growing recognition that non-financial performance data is important, tracking it remains a problem for some. While 87% of CEOs and senior executives described their ability to track financial performance as excellent or good, only 29% described their non-financial record as excellent or good. For these CEOs, the most important non-financial drivers of corporate performance were (in descending order of importance):
- Increasing risk to the company's reputation;
- Customer influence;
- Global competition;
- Regulatory emphasis on non-financial measures;
- Accelerating innovation;
- Growing scrutiny of non-financial performance metrics by the media;
- Increasing power of NGOs, lobbyists, and civic organisations.
Changes in governance
Deloitte suggests that overcoming the obstacles to monitoring non-financial performance appears to require significant changes in corporate governance. In terms of responsibilities, there are differences between financial indicators and non-financial indicators: While 80% of the CEOs surveyed said that the board and management should share responsibility in terms of monitoring the financial results of the company, when it comes to non-financial indicators, they said that the monitoring should be done by senior managers in most cases (except in the case of innovation, whose monitoring responsibility should be shared).
For the CEOs interviewed, impediments to the use of non-financial performance metrics include underdeveloped tools, organisational scepticism, unclear accountability, time constraints, and the concern that such metrics may reveal too much information to competitors. One critical element is the fact that reliable non-financial performance metrics are difficult to discern.
Providing a possible reason for this, Parrett explained: "Consistently tracking soft issues such as employee engagement, innovation or customer satisfaction is viewed as more art than science. On the other hand, financial metrics are more familiar and quantifiable to many. Clearly this reticence needs to change, as business leaders can improve performance and even financial results with a more balanced mix of financial and non-financial objectives."
Value of non-financial metrics
As Deloitte also highlighted in the report, the value of non-financial metrics is now more important than it was only a few years ago. More companies are including non-financial data in their annual reports or their shareholder briefings, and compensation structures continue to involve non-financial targets.
More than one-third of respondents (37%) said that a company's performance is determined more by intangible assets and capabilities than by hard assets. As companies gain experience with non-financial metrics, they discover a wide range of predictive, forward-looking managerial tools. More than half (54%) said that forward-looking information is of greater value to management and the board than historical information.
Triggers for change
When asked to identify the triggers most likely to spur their organisation to reassess how it measures and monitors performance, 54% mentioned "a greater understanding of how to measure non-financial drivers of performance", while 45% cited "a sharp decline in customer retention or customer satisfaction", and 43% pointed to "a request from a board member or the CEO for greater visibility and accountability".
Despite the apparent lack of data and metrics, Parrett remains optimistic about future usage of non-financial indicators: "In time, a growing number of companies will improve the quality of their non-financial performance measurements and adapt them more broadly in the enterprise. This will help them identify their edge over their competitors, improve performance and ultimately contribute to an improved bottom line."
The survey, entitled 'In the Dark II: What many boards and executives still don't know about the health of their businesses', was developed with the Economist Intelligence Unit (EIU). The full survey report has been made available for free download from the Deloitte web site - click here (1.2Mb PDF document; no registration needed).