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