Measuring stakeholder value
KPMG CORNER - John S. Bala () - August 19, 2008 - 12:00am

“The problem is that not everything that counts can be counted, and not everything that can be counted counts.” — Albert Einstein

In my last article, I talked about the shareholder value perspective giving way to the stakeholder value. The dominant shareholders’ perspective appears to be limited and fast becoming less popular than the stakeholder value perspective. The latter is actually an enlarged definition of firm value as it focuses not only on the economic performance of the firm but also on its environmental and social performance.

A common criticism to the stakeholder value perspective is the difficulty to measure such value. Despite its growing popularity, many still find the concept elusive, non-quantifiable and not easily discerned. While many are familiar with the measurement of financial value, whether in terms of economic value added (EVA) or other measures driving stock price performance such as net profit before tax, net tangible asset, earnings per share and price/earnings ratio, only a few are knowledgeable about how to measure stakeholder value. Indeed, how does stakeholder value work and how is it measured?

One way to measure stakeholder value is through the computation of the social efficiency of the firm. This metric is based on the theory that social acceptance and sound relationships between companies and stakeholders are a prerequisite for economic value creation and sustainable development. Indicators of social efficiency would include R&D expenditures, average hours of training per year per employee broken down by employee category, cost of employee health and safety, payments to government, voluntary contributions to civil society, value of imports versus exports, total new investments, local purchasing, total workforce with breakdown by employment type, gender, and number of convictions for violations of corruption related laws or regulations.

Related to this,  the change from one-dimensional financial reporting to the three-dimensional ‘triple bottom line’ accounting has recently emerged, prompting many organizations to take a more objective look at how they are creating value for their people, communities and the environment, rather than focusing on how they create value for the shareholders alone. Also known as TBL or 3BL, this new reporting framework was espoused in 1998 by John Elkington, the dean of the corporate responsibility movement. This new reporting framework focuses on the 3 Ps: People, Planet and Profit. A TBL report typically covers social, economic and environmental indicators which are reported in appropriate units and per peso of final demand or final output.  This accounting and reporting framework allows comparisons and benchmarking across a range of scales. For example, the social indicator of employment would be described as “the minutes of employment generated per peso of output”. The environmental indicator greenhouse gas emissions can be reported on as “kilograms of carbon-dioxide-equivalent per dollar of output”. Because these quantities have the common metric of one peso of output, they can be applied to the financial balance sheets of companies and thus allow Triple Bottom Line reporting at the company level that is commensurate with sectoral, regional and national reporting.

Also, to demonstrate their dedication to increasing stakeholder value, many companies have adopted Kaplan and Norton’s Balanced Scorecard (BSC) performance management system. BSC retains traditional financial measures. But since financial measures are inadequate for purposes of guiding management on how to create future value, this new performance concept views the organization from four perspectives: financial, customer, internal business process and innovation and learning. It develops metrics, collects data and analyzes them relative to each of these perspectives.

The stakeholder theory complements BSC by providing a more explicit stakeholder focus. It includes both leading and lagging performance indicators to provide a “balanced” view of company performance. Leading indicators include such measures as customer satisfaction, new product development, on-time delivery, and employee competency development while traditional lagging indicators include financial measures such as revenue growth and profitability.

Many other alternative frameworks have been developed over the years in the attempt to more comprehensively measure a company’s performance. This includes the Performance Prism and Quadruple Bottom Line.

Performance prism is actually a customized BSC framework.  It views the organization from five perspectives:

• Stakeholder satisfaction – Who are the key stakeholders and what do they want and need?

• Strategies – What strategies do we have to put in place to satisfy the wants and needs of our key stakeholders?

• Processes – What critical processes do we require if we are to execute these strategies?

• Capabilities – What capabilities do we need to operate and enhance these processes?

• Stakeholder contribution – What contributions do we require from our stakeholders if we are to maintain and develop these capabilities?

More recently, the Quadruple Bottom Line (QBL) has also emerged, adding corporate governance to the environmental, social and economic goals of TBL. This new performance evaluation focuses on a fourth goal, i.e., creating an internal environment that encourages and rewards ethical behavior by employees. In view of the scope and scale of the latest scandals, e.g., Enron and Worldcom, the re-discovery of ethics in business has received an impressive boost and QBL is fast gaining acceptance as a new performance management system.

The use of social efficiency, TBL, BSC or QBL are just but a few of the many measures of corporate performance that have been developed in recent years.  They are all characterized by  (1) the considerable role of non-financial performance measures or value to stakeholders other than owners and (2) the attempt to possibly cover all dimensions of corporate performance.

The measures I just discussed do not accurately measure company performance and they should not be the only accountability device to use. Nor should they be the sole measure of stakeholder value. But imperfect as they are, they serve the purpose. They enable policymakers and the public to answer much more confidently the question “Is the company creating competitive advantage by understanding their key stakeholders’ interests?”. More importantly, they change behavior and spur change in values.

 (John S. Bala is a Partner for Business and Financial Advisory Services of  Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email manila@kpmg.com.ph or jbala@kpmg.com).

ALBERT EINSTEIN FINANCIAL MEASURES PERFORMANCE SOCIAL STAKEHOLDER VALUE
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