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Few companies score highly in performance and commitment measures
Jim Kelly - Financial Times, Thursday December 10 1998
It is difficult to imagine an annual report and accounts that does not contain the following sentence or one very similar: "Our company is committed to the highest levels of customer satisfaction."
You only have to turn this platitude on its head to see how meaningless it is. How many companies are dedicated to the lowest levels of customer satisfaction?
Today the Foundation for Performance Measurement publishes research based on the annual accounts of the FTSE 100 companies (as at April 7 this year) which judges them on the "clear provision of substantive data, across a time period, with an accompanying target for the measurement of future performance."
The awful platitude already quoted would have been awarded one point by the foundation. The points go up in steps as the information becomes more useful, so that:
Surely a company wanting to pick up four points could simply state next year that a recent survey had showed 70 per cent satisfaction and it was aiming for 75. But the foundation believes that these forecasts are the key indicators of management commitment.
The research show that only 5 per cent of data measured made any reference at all to targets for future assessment and only 40 per cent contained trend data. Even the best performers fell down when it came to committing themselves to future targets – while picking up points in the other categories.
The FTSE 100 companies were ranked in terms of 19 categories of performance measurement, covering financial data (risk for example), activity data (productivity and quality), development (brand development), environment (health and safety) and relations (staff performance and learning). Scores of 0-4 were given in each.
The best performers were Orange (66 per cent), J. Sainsbury (63 per cent), SmithKline Beecham (63 per cent), Marks and Spencer (62 per cent), Safeway (62 per cent), with Asda, Shell, Tesco and Zeneca all on 61 per cent. A veil is drawn over the worst performers but those in the "lower quartile" include Amvescap, Bass, Ladbroke, P&O, Rank Group, Schroders and United News. Diageo was not ranked as it did not make the deadline.
Does any of this mean anything? The results certainly show that stakeholder pressures produces results. The best information came from those companies in the public or media spotlight – concern for the environment is clearly a catalyst for change in the oil, chemical and extractive sectors.
The results also show disappointing progress in the measurement of non-financial data. This only goes to show that despite years of debate, environmental reporting is still at a very early stage in terms of providing measureable targets and commitments. Social and ethical performance measurement is even further behind the financial data – which are "poor" anyway. There are a couple of exceptions – reporting on community involvement is high but probably reflects its public relations value.
There is one astonishing failure: customer service scores 24 per cent across the survey, showing that it is largely ignored by managements. "Most disappointing was the lack of attention that was paid to this measure by the companies in the service sector," say the authors.
The hypothesis of the foundation’s draft report is that performance measurement in annual reports does not match best practice as accepted by companies for internal use.
The report will be used as the basis for more debate on the subject. Some points spring straight to mind. For a start, it is not true that most internal performance data remain confidential because they are of more use to competitors than shareholders? And might it not be true that the reason many companies do not publish such data is that they fail to track them?
Neither of these arguments should be used to frustrate better disclosure. The foundation is right to encourage companies to disclose at least a flavour of the kind of indicators they use internally. The idea is flexible financial reporting, not prescription. If nothing else, such disclosure at least signals to shareholders that the board recognises the importance of performance measurement.
For managements the issue will always be a tightrope. What would the board do, for example, if having published product quality scores in its annual report for 10 years and seen them rise from 50 per cent of target to 90 per cent, it then finds that this year’s score is to be 10 per cent? The board could fudge the issue by publishing changing indicators. Or should it decide that long term shareholder value is best served by publication and remedy?
Tomorrow’s shareholder might be happier – but not today’s. What is encouraging is that it is the disclosed indicator that presents managements with this dilemma – otherwise an uncomfortable problem could be happily ignored.