From Roopen Roy's column in the Financial Chronicle
Every so often management gurus will remind you: “What gets measured, gets
done.” That aphorism is very true. However, there is a flip side. If you are
using the wrong yardstick, you may achieve unintended results and cause
unwarranted behaviour. The critical question is: if your measures are not in
harmony with your core mission, what happens then?
In the 1960s and 1970s,
creation of employment was a measure of success for public sector undertakings.
We, thus, had the phenomenon of state electricity boards focusing on generation
of employment with single-minded zeal. Generation of electricity was almost an
afterthought. In the US, success of most corporations was measured by a dominant
metric: shareholder value. The tool used to incentivise executives consisted of
linking their performance and pay to the creation of shareholder wealth. In
corporations that practiced amnesia about the interests of other stakeholders —
we witnessed bad behaviour and greed.
In India, there are turnaround experts
who focus on balance-sheet restructuring as the sole method of reviving
companies. They are often oblivious to the core mission of the enterprise.
Earlier this year, I attended a glittering event heralding the revival and
turnaround of a regional stock exchange. How was the success of this turnaround
measured? Were more companies flocking to list at this exchange? Had the volumes
of trade gone up by any appreciable measure? The answer to uncomfortable
questions like these was a resounding “No”.
What was the basis of the claim
for turnaround then? The restructured balance sheet was the answer. The asset
base of the exchange had been battered in the past. A scam had driven a Rs
100-crore plus hole in the reserves. It had been limping along until it was
decided to demutualise the exchange by selling shares to non-brokers. The
exchange owned a 10-acre plot in a prime location, allotted to it by the
government at a low price. That piece of land is now worth over 30 times of the
book value. The idea was to auction the land. Then take the proceeds. Buy a
cheaper plot in the suburbs, move the exchange building there and execute a real
estate project. The rental income and the interest on fixed deposits would,
thereafter, provide a ready stream of cash flow. Hallelujah! This would provide
large and quick returns to new shareholders. The cash would guarantee the
salaries of existing employees even if the exchange was on a ventilator. The
balance sheet would look healthy and debt-free. The tough job of having to
revive the core business of the stock exchange can be postponed. It is like a
failed wildlife preservation project turning around financially by allowing the
wardens to sell the horns of dead rhinos and tusks of departed elephants.
In
measuring corporate performance today, the focus is largely on historical
performance. Most measures today are quantitative and financial. They are
designed to assist investors, regulators and other stakeholders. A global
initiative is underway for countries to embrace the International Financial
Reporting Standards (IFRS). IFRS are considered a “principles-based” set of
standards in that they establish broad rules and dictate specific treatments as
well. The adoption of IFRS globally will be a huge leap forward in terms of
consistency, transparency and comparability. There is another initiative that is
likely to gain momentum as market economics is tempered by social responsibility
and sensible regulation.
In 1994, John Elkington coined the term “triple
bottomline” (TBL). It helped to develop a three-dimensional measurement
framework of corporate performance. It added two other dimensions to measurement
of results apart from financial — environment and social. Today, the three
dimensions are people, planet and profit, which
lead to sustainable economic
progress.
The “People Bottomline” (human capital) pertains to fair and
beneficial business practices toward labour and the community. Sustainability is
underpinned by the well being of corporate, labour and other stakeholder
interests that are interdependent. A portion of profit from the sale of end
products is upstreamed to the original producer of raw materials, i.e., a
farmer. Enterprises should not exploit child labour, pay fair salaries to its
workers, maintain a safe work environment and provide work/life balance The
enterprise will strive to “give back” by contributing to the growth of its
community.
The “Planet Bottomline” (natural capital) refers to sustainable
environmental practices. Enterprises are expected to control carbon emissions,
reduce energy consumption and manage waste in an ecologically-friendly manner.
At present, the cost of disposing of non-degradable or toxic products is borne
financially by the community. An enterprise that produces and markets a product
that will create a waste problem should not be given a free ride by
society.
The “Profit Bottomline” is the ability of an enterprise to create
economic surpluses. Without profits, enterprises would be
unsustainable.
Green initiatives in supply chain and manufacturing are now
components of mainstream strategy. Sustainability and global warming are real
and critical issues that global businesses must deal with. Thus, measurement of
corporate performance in the future must include environmental and social
dimensions in addition to economic results.
Several years ago, I came across
an advertisement of a famous brand of Scotch whisky. The ad said, “It is not how
long you mature the whisky, it is what you mature.” Plagiarising the tagline, I
would submit that it is far more important what you measure rather than how you
measure. Picking incorrect measures may result in unintended behaviour.
Passionately pursuing and achieving wrong metrics will invariably lead to
winning the battle and losing the war.
(The writer is the managing director of Deloitte & Touche Consulting. These are his personal views.)
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