Week 4

1. Week 4 Performance evaluation and performance reporting

2. Money is the onlypart 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

3. 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

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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

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

12. 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Principles of environmental reporting • Relevance • Comprehensibility • Verifiability • Completeness • Comparability

22. 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

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

24. 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

26. 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

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

28. 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