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Balanced
Scorecard reporting and shareholder value
By Ravi Mahendra
Our columnist advises investors to acquire
adequate information about the companies in which they plan to invest,
pointing out that those which are more forthcoming might be better
bets than those that are not.
The
concept of shareholder value is often based on the current earnings
of the firm, the level of confidence the market has on the firm
as well as the strategies which the management has announced. At
times it makes one wonder whether the information companies are
providing to their shareholders is adequate enough for them to form
a reasonable opinion of their performance measured in different
ways. Enron is a good example where it was showing healthy earnings,
confidence levels were high and there were rosy projections for
the future. The performance was measured only from the financial
side simply ignoring many other factors which could have in fact
highlighted some of the performance weaknesses in advance.
What
is the balanced scorecard
This is a balanced form of reporting performance where the performance
is measured from the point of four perspectives. The perspectives
are:
-Customer perspective
-Internal perspective
-Innovation and Learning perspective
-Financial perspective
This attempts to look at performance from different angles rather
than focusing on one performance measure, which is the earnings
per share.
Customer
Perspective
This perspective looks into whether the firm is committed
towards creating long-term value for its customers. Long-term value
will lead to customer satisfaction and that will in time turn into
shareholder value. Customer perspective performance measures can
include those such as the number of customer complaints, repeat
purchases by customers and new customers introduced by existing
customers.
Internal
Perspective
This basically looks into whether the organisation's internal processes
are efficient and whether there is satisfaction and high morale
among the staff and management. The measures may include those such
as: plant capacity utilisation, labour turnover and number of accidents
within the premises during a period.
Innovation
and learning perspective
The key to success today from an organisational point
of view is being innovative and building a learning organisation.
Dialog GSM in Sri Lanka is an innovative organisation while Toyota
has won accolades in the international arena. Within this perspective
reporting measures can include: new product launches, awards achieved
and new concepts introduced.
Financial
perspective
This indicates an organisation's current financial position and
is as important as the other perspectives. The performance measures
within this perspective could include: earnings per share, the debt
to share capital ratio of financing (gearing) and working capital
measures.
The
usage of balanced scorecard
The balanced scorecard is often used for internal performance reporting
to the management. It may be useful for the shareholders if the
information as per the balanced scorecard is provided to them in
their annual reports in a clear form where they could assess the
performance. If this is to be formalised, accounting as well as
auditing standards should be developed in this regard.
Message
to the small investor
The value of your investment depends on the long-term value a company
is capable of generating. To assess this you need information. Information
not only on current financial performance but also with regard to
customer satisfaction, internal efficiencies as well as the ability
of the company to innovate and learn. Companies which can provide
this information and show an admirable track record in this area
would in fact be safer investments than companies which do not.
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