Strategic Performance Monitoring and Management: Using Non-Financial Measures to Improve Corporate Governance

John Waterhouse and Ann Svendsen
for the Canadian Institute of Chartered Accountants
November, 1998

EXECUTIVE SUMMARY

This research report explores the importance and role of non-financial performance measures in providing boards of directors and senior management with the information needed for effective corporate governance. While our current system of financial measures based on accounting remains essential for effective corporate governance, it is clearly inadequate on its own.

 

A model for Strategic Performance Monitoring and Management is described in Section 3 and illustrated throughout the report. Key features of the model include:

¨      linking strategy and performance measurement,

¨      managing explicit and implicit relations with stakeholders,

¨      using feedback to encourage organizational learning,

¨      communicating and linking p[performance measures to foster understanding and commitment.

 

A survey of Canadian performance measurement practice assessed the degree to which performance measurements fit with the stated strategic priorities of the companies and the chief executive officers and the directors who were surveyed. The most highly rated strategic priorities were to establish good customer relations, to develop the capacity to innovate and respond to markets, and to ensure internal operating efficiencies. The survey revealed that the degree of ‘fit’ between performance measurement and strategic priorities is highest in relation to operating efficiencies, product quality and the environment, and somewhat lower with respect to intellectual capital, capacity to innovate, customer relations, investor relations, shareholder relations, and public relations.

 

The report also represents and in-depth study of performance management practices in five major Canadian corporations: Nortel, the Bank of Montreal, Nova, Syncrude, and Noranda. These case studies are summarized in Section 4, with additional detail provided in Appendix B. Of particular note is that:

¨      The strategic plans of all five companies studied identify the need to satisfy key stakeholders such as customers, shareholders, employees, suppliers and business partners, and the local community or society at large.

¨      Their performance monitoring and management systems track results in relation to these key stakeholders and report results to boards of directors or their equivalent governing councils.

¨      Key activities necessary to effectively manage stakeholder relations are communicated throughout the organization and monitored through the non-financial performance measurement system.

 

Non-financial performance measures that are based on the strategic performance management and monitoring system may assist members of boards of directors to ensure that:

¨      appropriate processes are in place to enhance learning within the organization,

¨      all key stakeholder interdependencies and relationships are being effectively managed and;

¨      appropriate disclosure and assurance systems are in place where it would be useful to communicate non-financial performance measures to external stakeholders.

 

This report concludes by recommending that CAs and other leaders of the finance and reporting functions become more involved, beyond their traditional accounting focus, with performance measurement and with guiding senior management in developing and reporting non-financial measures. CAs must become experts at a broad range of measurement activities and act as consultants to those who use such measures. Accountants should work closely with people at all levels of the organization to identify key linkages between performance measures and business outcomes, and to reflect these linkages in an effective strategic performance monitoring and management system. This is a vastly expanded and enhanced role for CAs.

Table of Contents

1.0    Introduction

            1.1       Limitations of Existing Financial Performance                         Measures and Systems

            1.2       New Strategic Performance Monitoring and                         Management System and Scorecard

1.3             Purpose and Scope

1.4             OVERVIEW

2.0    Performance Measures and Corporate Governance

            2.1       Board Roles, Responsibilities and Information                         Requirements

            2.2       Use of Performance Measures by Boards and Chief                         Executive Officers in Canada

            2.3       Strategic Fit: Do Boards Receive Performance                         Measures on Strategically Important Issues?

            2.4       Disclosure and Assurance

3.0    Strategic Performance Monitoring and Management

3.1       the proposed system

3.2       KEY CONCEPTS AND IDEAS

3.3       THE PERFORMANCE MONITORING AND MANAGEMENT SYSTEM

3.4       DESIGNING A PERFORMANCE MANAGEMENT SYSTEM THAT SUPPORTS FEEDBACK AND LEARNING

3.5       ISSUES RELATING TO THE SELECTION OF PERFORMANCE MEASURES

                       

4.0    Strategic Performance Monitoring and Management in Action: Applications in Five Companies

 

5.0    The Future: Issues and Directions

Appendices:    

            Appendix A            The Survey

            Appendix B           Case studies

            Appendix C           Measurement and disclosure issues

Bibliography