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Article -> Nonfinancial Measurement of Shareholder Value

Date Added: February 2005

Whether public or private, organizations increasingly are tracking more financial factors to measure shareholder value. This may include revenue, earnings, cash flow or EBITDA (earnings before interest, taxes, depreciation and amortization).

Many of these same organizations are measuring nonfinancial areas such as customer loyalty or employee satisfaction. Oftentimes, there is a cause-and-effect relationship between the nonfinancial and financial areas; however, the relationship is not effectively measured.

A study* found that only 23% of companies have effective measurement systems designed to generate shareholder value. Several common mistakes occur with the remaining 77%, such as: (a) not linking measures to strategy, (b) basing information on perceptions versus actual measures, (c) setting incorrect performance targets, and (d) measuring incorrectly.

A successful model can help an organization achieve its market and financial goals. It should link all factors throughout the value chain - employees, customers and strategy - to generate and align shareholder value measures. An example of a successful shareholder value model is:

Employee recruiting Employee satisfaction/training Employee engagement Customer needs identification Customer satisfaction/loyalty Sustained profitability Increased Shareholder Value.

Data and measurement must be clearly linked among these areas. This cause-and-effect model creates alignment from recruiting new employees to increased shareholder value. The model guides senior leaders in decision-making because whether shareholder value is high or low, leaders easily can see measures across the entire value chain to determine key areas that are competitive advantages or opportunities to improve.

Achieving this model requires a clearly defined strategic plan with measurable objectives that can be used as a cornerstone of the model. Organizations should form cross-functional teams to determine the areas within the value chain that already are being measured, and those where a process needs to be defined. Baselines should be measured and set in all areas. Continually measurement should occur. And then... watch shareholder value increase.

* Ittner, Christopher D. and David F. Larcker. "Coming up Short on Nonfinancial Performance Measurement." Harvard Business Review: November 2003, pages 88 - 95

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