Each organisation establishes Enterprise Performance Management (EPM) system to monitor whether it is moving in the right direction to achieve its goal- strategic objectives. Top management uses different metrics to monitor strategy implementation. This is essential because a good strategy might fail due to poor implementation. EPM system in business firms has gone through many changes. It evolves in response to changes in the business environment (e.g. economic, social, political and technical), business strategy and the organisation structure. Managers design new EPM system whenever they find the existing system inadequate.
At one time, business firms used to focus solely on financial performance. Short-term financial success was at the focus because the same was the driver for sustainability and growth. Firms used metrics based on accounting numbers such as return on invested capital (ROIC). General Electric Company started using residual income to measure divisional performance in early 1950s. Residual income (popularised as Economic Value Added (EVA) by Stern Stewart & Company, a consultancy firm), resurfaced in 1990s as an important metric to measure performance and many companies started using the same to measure overall and divisional performances. But, in a competitive and dynamic business environment, both accounting based metrics and residual income are useful to measure year-to-year performance. Short-term financial success does not ensure sustainability and growth. They are inadequate to provide signals how effectively the firm is managing variables and activities that are key to long-term success.
The concept of balance scorecard in a way revolutionised the EPM. It endeavours to balance short-term and long-term perspectives. It also combines lead indicators and lag indicators and uses non-financial metrics with financial parametres. Moreover, the focus of the balanced score card is on strategy rather than on controls.
Many firms have adopted the concept of balanced scorecard and have developed separate scorecards for different management levels. Balance scorecard measures performance from four perspectives financial perspective, customer perspective, internal business perspective, and innovation and learning perspective. All the four perspectives are interrelated. The underlying assumption is that the purpose of a business is to create, retain and provide value to customers and in the process to create shareholder value. Consequently, firms should monitor performance from customers perspective. They should also monitor how they are managing product and process innovation and internal business processes in enhancing value being delivered to customers at a reduced cost. The theme is better products and services at lower cost. Thus, the pivotal of the balanced scorecard is shareholder value.
It is the time that we develop a new EPM model, particularly for the top management and the board of directors. Companies cannot just focus on shareholder value. They can no more ignore environmental and social responsibilities. It is well established that the board of directors, which is appointed by shareholders, is trustee for shareholders fund and it is in a fiduciary relationship with shareholders. Therefore, Boards primary responsibility is to protect shareholders interest. We now observe a paradigm shift. The board continues to be accountable to shareholders. But it is also accountable to the society in general. It is responsible for monitoring firms economic performance and performances in areas of environmental and social responsibilities. The CEO and the board of directors have to take a holistic view. They cannot evaluate enterprise performance in silos. They should not think that in a packing order of responsibilities, economic responsibility stands at the top and social responsibility sits at the bottom.
The integrated reporting framework being developed by the International Integrated Reporting Council (IIRC), which is a global coalition of regulators, investors, companies, standard setters, companies and NGOs, is an endeavour to present an integrated report card of the firms performance in respect of economic, social and environmental responsibilities to shareholders and other stakeholders. When external reporting takes an integrated approach, internal reporting necessarily has to adopt the same. There is a need to develop an EPM system that incorporates metrics to evaluate performance in all the three areas. Similarly, metrics should be developed to measure performance against each principle laid down the Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVG) issued by the government. Most investors take economic decisions based on the economic performance of the company. They do not attach importance to performance in environmental and social responsibilities. It is the responsibility of enlightened companies to educate investors about the environmental and social responsibilities of business. Family managed companies should take the lead because ignoring those responsibilities will affect the companys economic performance in the long term and will hurt the reputation of the family. Consequently, the familys interest will suffer the most.
Let us hope that the management accounting profession in India will rise to the occasion to help companies in designing and implementing a new EPM system.
Affiliation: Head, School of Corporate Governance, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited
