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Mumbai: Many board members and senior executives are still in the dark about the overall health of their organisations because they lack high-quality non-financial information.
According to the second edition of the Deloitte Touche Tohmatsu survey, In the Dark: What many boards and executives still don't know about the health of their businesses, developed in conjunction with the Economist Intelligence Unit and released today, 78 per cent of the CEOs surveyed say that financial indicators alone do not adequately capture their company's strengths and weaknesses.
Those surveyed admit that they need information on non-financial performance indicators, but the ability of executives to monitor their performance against them remains inadequate. "The survey reveals a critical disconnect between rhetoric and reality in the boardrooms and management circles of some of the world's leading companies," said Deloitte CEO, William G. Parrett. "The attitudes of CEOs towards understanding the value of non-financial indicators and measuring performance against them are more positive now compared to the last survey (2004), but it seems executives and boards are not yet prepared to take the next step and act. "The majority of companies said they are under increasing pressure to measure these indicators, but the quality of non-financial performance information they receive is inadequate to meet their needs," he said. The results of the second survey indicate that 57 per cent of the companies surveyed are under increasing pressure to measure non-financial indicators, and that a growing number of companies are indeed creating significant value for their organizations by understanding their underlying performance drivers through the use of non-financial measurements. Customer satisfaction, innovation, and employee commitment are identified as key drivers of performance among the companies interviewed. Further, 83 per cent of respondents say that the market itself is increasingly emphasizing non-financial performance measures.
Despite this, tracking non-financial performance data remains a problem for some. While 87 per cent of CEOs and senior executives describe their ability to track financial performance as 'excellent' or 'good', just 29 per cent of them describe their non-financial record as 'excellent' or 'good'. For them, the most important non-financial drivers of corporate performance are (in order): -
Increasing risk to reputation
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Increasing customer influence
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Increasing global competition
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Increasing regulatory emphasis on non-financial measures
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Accelerating innovation
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Greater scrutiny of non-financial performance measures by the media and
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Increasing power of NGOs, lobbyists, and civic organisations "This report clearly shows a disconnect between demand and supply. Boards and management teams by their own admission see that the information they need is not the information they are receiving. So as this latest report on the state of non-financial reporting reveals, there is much more work to be done," said Parrett. The research 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 per cent 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 said, "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."
The value of non-financial metrics is more important than just 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 a third of the respondents (37 per cent) say that 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. Fifty-four percent say forward-looking information is of greater value to management and the board than historical information. When asked to identify the triggers most likely to spur their organization to reassess how it measures and monitors performance, 54 per cent of the CEOs surveyed mention a greater understanding of how to measure non-financial drivers of performance. Of the respondents 45 per cent point to a sharp decline in customer retention or customer satisfaction, and 43 per cent mention a request from a board member or the CEO for greater visibility and accountability.
Parrett remains optimistic about the future use of non-financial indicators by business, which will help CEOs better understand the overall health of their organization. He said, "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. It is a matter of understanding that a more balanced mix of financial and non-financial objectives can improve performance and even financial results."
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