Boards remain in the dark about the true
Boards remain in the dark about the true health of their business.
Themes 1. Non financial measures 2. Boards are still in the dark 3. Performance, governance & risk 4. Conclusions 5. Questions 12/06/2021 © 2007
1. Non-financial performance measures
4 pieces of research 175 global directors 2006 100+ chairs & directors ASX 2007 250 global directors 2004 40 ASX 200 CFOs 2007
What do we mean by non-financial? § Customer satisfaction § Operational performance § Innovation § Product/service quality § Employee commitment § Quality of relationship with suppliers § Quality of governance & management process § Brand strength § Impact on society & environment 12/06/2021 © 2007
Why are non-financial measures important? Lead indicators for future financial performance MARKET VALUE Customer Satisfaction Product/Service Quality Brand Strength Stakeholder Relationships Society and Environment Impact Governance Innovation Operational Performance Sustainable Business Value Employee Commitment BOOK VALUE Financial Reporting Now Communities Customers Employees Government Partners Investors 12/06/2021 © 2007
Greenhouse gas CSR emissions Carbon Footprint Corporate responsibility Sustainability 12/06/2021 © 2007
Boards are still in the dark… 87% vs. 29% 85% 56% 83% 37% 12/06/2021 © 2007
Some things change – nothing stays the same § Recognition - little action § Are things the same? – Customer satisfaction – internet – Employee engagement – war for talent Status quo = a lot worse 12/06/2021 © 2007
What is driving the need for non-financials 12/06/2021 © 2007
2. Why are boards still in the dark?
Why are boards still in the dark? § Systems & tools § Linkage § CFO reticence 12/06/2021 © 2007
Systems & Tools § Collect financial data only § Extraction ie data not used to full potential § Lack of history § 59% of CFO’s surveyed saw undeveloped tools as the primary barrier to reporting non-financial measures § 12/06/2021 Data Analytics - useful data from unusual places © 2007
Linkages – determining how non-financial measures link to shareholder value… • Need for clarity of definitions • Drive from a management & financial first with external reporting second • Report what is right for the company – not what imposed by a framework or benchmark 12/06/2021 © 2007
CFO reticence § Some reluctant for fear of board spiralling from strategic into operational § Others saw non-financial as key to focus on strategic issues – impact future performance May 2007 Deloitte CFO forum results § 100% believe non financial believe non-financial measures can improve financial performance § 47% would rate their ability to track non financial information as poor, fair or average 12/06/2021 © 2007
May 2007 Deloitte CFO forum results The top 4 areas in which company’s needs better quality non-financial information to manage are; § Employee Commitment § Customer satisfaction § Greenhouse footprint § Quality of Governance and management process 12/06/2021 © 2007
3. Performance, governance & risk
Corporate governance implications § Three years ago – ASX Governance focused more heavily on financial risk – Financial institutions focused heavily on credit and market risk – Regulators focused heavily on financial risk § Today – ASX Governance focuses on all risk including operational risk – Financial Institutions developing sophisticated operational risk systems – Regulators have a much broader focus on risk § Risk – particularly operational risk - involves the measurement of indicators – both financial and non financial 12/06/2021 © 2007
Corporate governance & risk § Governance and Risk management as required by the various regulators and stakeholders has moved on and expectations are that organisations: – have systems in place to measure risk – test and update those systems on a regular basis – for those systems to give warnings of potential surprises well in advance § In additional, Executive compensation structures are increasingly including non -financial targets 12/06/2021 © 2007
What are Australian boards saying about non-financials & performance? Performance driven by intangibles v hard 74% Forward looking more value than historical 92% Financial alone does not capture strengths 0% 12/06/2021 26% 8% 95% 10% 20% 30% 40% 5% 60% 70% 80% 90% 100% © 2007
So, who has responsibility? 12/06/2021 © 2007
5. Conclusions
Conclusion § Surveys - non-financial becoming increasingly important § Boards & management realise – but little has changed in 2 years § Imperative to measure and monitor both financial and non-financial performance measures § Systems and linkage are a barrier – but excuse § Regulation is forcing the process § Good governance and performance management should be the real drivers § Top organisations have made significant ground § Responsibility of both board and management 12/06/2021 © 2007
6. Questions
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