Week 4 Performance evaluation and performance reporting

Money is the only part of the circulating capital of a society, of which the maintenance can occasion any diminution in their net revenue. Smith (1776) - The Wealth of Nations

A tale of 2 countries Cotton: Cost of production = 78c per pound Market price = 48c per pound In USA – subsidies provide the difference In Benin – farmers go out of business In UK – price of clothing has fallen 14.7% over the past 5 years

What is performance? For shareholders For other stakeholders Long v short term Sustainability? Ethics?

Problems with traditional financial reporting Claims to measure value that is created but actually measures value distributed to shareholders this can be at the expense of other stakeholders

The assumptions of shareholder value analysis the only concern of the firm is returns to owners returns to the firm equate to returns to society classical liberal economics market mediation desirability of economic growth

Problems with accounting to shareholders only Fundamental assumption is that this will results in value created for all short term v long term value creation v value expropriation distribution conflicts

Short v long term considerations organisational effectiveness based upon long term considerations (Govinderajan & Gupta) SVA addresses long & short term issues (Rappaport) Focus on shareholder value leads to short termism (Coates et al)

Performance measurement styles budget constrained style performance judged on budget attainment profit conscious style performance judged on contribution to organisational goals non-accounting style performance not based on accounting data

Potential defects of accounting performance measures completeness quantifiable short term v long term surrogate measures accuracy standards set comparison of targets and actuals neutrality effort v results effects of decisions taken elsewhere

Short term v long term Creating short term value through managerial action Acquisitions and divestments Share price and market considerations Creative accounting

The survival motive survival of the dominant coalition sub-optimal performance through: risk minimization short termism overt and covert behaviour shareholder value and the dominant coalition

Relating rewards to value traditional view - rewards to capital for risk value added through expertise ownership of value in the business managerial stake who is firm managed for? satisficing

Valuing welfare definition of welfare economic wealth not synonymous with welfare problems with wealth maximisation increasing wealth reduces welfare (Mishan) sustainability

Problems of economic rationality model assumptions of rational economic behaviour quantitative predictions assumptions underlying analysis risk evaluation paradigm shift

The measurement of performance Temporally by enabling the comparison of one time period with another Geographically by enabling the comparison of one business, sector or nation with another Strategically by enabling alternative courses of action and their projected consequences to be compared

The components of measurement Language to express results Specification of objects to which the results will apply Standardisation for transferability between organisations or over time Accuracy and control to permit evaluation

The balanced scorecard Financial perspective - how does the firm look to shareholders Customer perspective - how do customers perceive the firm Internal business perspective - what must the firm excel at Innovation and learning perspective - can the firm continue to improve and create value

The environmental audit 1 the extent of compliance with regulations and possible future regulations the extent and effectiveness of pollution control procedures the extent of energy usage and possibilities increasing for energy efficiency the extent of waste produced in the production processes and the possibilities for reducing such waste or finding uses for the waste necessarily produced

The environmental audit 2 the extent of usage of sustainable resources and possibilities for the development of renewable resources the extent of usage of recycled materials and possibilities for increasing recycling life cycle analysis of products and processes the possibilities of increasing capital investment to affect these issues the existence of or potential for environmental management procedures to be implemented

Principles of environmental reporting Relevance Comprehensibility Verifiability Completeness Comparability

Quantitative analysis Financial performance Social performance Conclusions: If a company performs well along one dimension of performance then it also is likely to perform well along the other dimension of performance

Disclosure Does increased disclosure demonstrate social responsibility? How: Annual reports Web sites Press releases

Objectives of environmental accounting measuring environmental impact developing closer realtionship with society transferring power to other stakeholders transparency benefits: decreased laibilities improved image anticipation of regulation development of future markets

Social accounting measuring impact on society...every large corporation should be thought of as a social enterprise: that is as an entity whose existence and decisions can be justified insofar as they serve public or social purposes Dahl 1972 analysing externalities

Reporting performance Reporting to who? Shareholders Investors Stakeholders How? Generic Specific What?

Creating value through transferring costs short term value created through transferring costs externalising costs: customers suppliers society transferring costs into the future investment pollution costs transferred from the past