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Week 4
Performance evaluation and performance reporting
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Money is the only part 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
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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
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What is performance?
For shareholders For other stakeholders Long v short term Sustainability? Ethics?
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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
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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
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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
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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)
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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
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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
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Short term v long term
Creating short term value through managerial action Acquisitions and divestments Share price and market considerations Creative accounting
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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
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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
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Valuing welfare
definition of welfare economic wealth not synonymous with
welfare problems with wealth maximisation increasing wealth reduces welfare
(Mishan) sustainability
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Problems of economic rationality model
assumptions of rational economic behaviour
quantitative predictions assumptions underlying analysis risk evaluation paradigm shift
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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
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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
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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
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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
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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
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Principles of environmental reporting
Relevance Comprehensibility Verifiability Completeness Comparability
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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
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Disclosure
Does increased disclosure demonstrate social responsibility?
How: Annual reports Web sites Press releases
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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
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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
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Reporting performance
Reporting to who? Shareholders Investors Stakeholders
How? Generic Specific
What?
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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