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In the dark II:What many boards and executives STILL don’t know about the health of their businesses

Audit.Tax.Consulting.Financial Advisory.

I. Survey background 1

II. Survey highlights 2

III. Non-financial metrics: The quest for greater insight 4

IV. The current state of oversight 7

V. Redefining performance measurement 11and governance: The way forward

VI. Conclusions 18

VII. Questionnaire 20

Index

Survey backgroundThere is no escaping the value of financialmetrics; there is no escaping the need togenerate financial returns.

But for some time now, executives havebeen examining the ways that they mightbetter understand the health of theirorganizations and improve overallperformance—financial performanceincluded—by focusing some of theirattention on non-financial measurements.

Business leaders have long understood thatwhat you measure is what you get. Moneydrives markets, so the financialmeasurements that drive companyvaluations produce the precise sort ofreturn-focused behavior expected by mostinvestors.

Few would deny this, but are metrics suchas cash flow, sales or earnings the truedeterminants of corporate performance or ameans of scoring the success of lessfinancially focused business activities andstrategies? It is from this perspective thatbusiness executives, always in search of acompetitive edge, are asking increasinglysophisticated questions about performancemeasurement.

For example:

• Do current performance measurementprograms adequately inform and assistdecision-making by the board and seniormanagement?

• Is a focus solely on financial metrics thebest way to drive performance?

• Are there certain non-financial indicatorsthat so closely correlate with financialperformance that they are in fact leadingindicators of that performance?

• Could a greater focus on certain non-financial metrics actually improve financialperformance?

• To what degree is financial performancedriven by customer satisfaction oremployee engagement?

• Are there risks in failing to measure orreport progress on issues of corporatesocial responsibility?

• Can performance be improved byassessing the organization according to amore balanced mix of both financial andnon-financial objectives?

• Do certain carefully selected non-financialperformance measurements offermanagement, and even investors, a moreuseful set of leading indicators thanfinancial measurements?

1

In 2004, Deloitte Touche Tohmatsu (DTT), incooperation with the Economist IntelligenceUnit, examined these issues and publishedthe findings in a report titled “In the Dark:What boards and executives don’t knowabout the health of their businesses.” InMarch and April 2004, the EconomistIntelligence Unit surveyed 249 seniorexecutives and board members around theworld and interviewed a number ofcorporate directors in North America,Europe and Asia. The report concluded:“While the overwhelming majority of boardmembers and senior executives say theyneed incisive non-financial information ontheir companies’ key drivers of success, theylargely find such data to be lacking or, whenavailable, of mediocre to poor value.”

Almost three years later, Deloitte and theEconomist Intelligence Unit worked togetherto see whether things had changed andconducted the research along much thesame lines as before. A global surveyfielded in December 2006 obtainedresponses from 175 senior executives andboard members. Then, through January2007, in-depth telephone interviews wereconducted with senior executives and boardmembers at large companies.

The questions and the multiple choices ofthe second survey were based on, but notexactly the same as, the first questionnaire.Also, the respondents in the two surveysvaried. While the statistical results are notdirectly comparable number for number, thebroad observations and trends are clear.

Section ISurvey background

The broad trends seen in this 2007 survey*are remarkably similar to those from the2004 survey. Many board members andsenior executives are still in the dark aboutthe overall health of their organizations andhave a lack of high-quality non-financial datathat they can act upon. As with the firstsurvey, corporate leaders believe that it isextremely important to monitor non-financialindicators such as customer satisfaction andemployee commitment, but many admit thattheir firms do a much poorer job atmeasuring these indicators than at gatheringand analyzing financial data.

The picture is not entirely bleak, however.The results of the second survey indicatethat a growing number of companies areindeed creating significant value for theirorganizations by starting to understand theirunderlying performance drivers through theuse of non-financial measurements.

Overall, this survey casts fresh light on theseissues, suggesting that businesses arecontinuing to focus on financial indicators,while paying more attention to otherperformance measures. Achieving a betterbalance between financial and non-financialperformance should not entail paying lessattention to the former, but instead payingproper attention to both.

Some key findings include:

(1) Existing performance measurementframeworks are inadequate, and themajority of executives perceive agrowing need to better understand theunderlying drivers of their performancethrough non-financial measurements.

• Eighty-three percent of respondents saythe market itself increasingly emphasizesnon-financial performance measures—afigure that rises to 87 percent ofrespondents at companies withUS$1billion or more in revenues.

• Among those respondents, over threequarters (78 percent) say that financial

indicators alone do not adequatelycapture their companies’ strengths andweaknesses. The figure rises to 85percent of respondents at companies withover US$1billion in revenues.

• Sixty-nine percent say that it is theresponsibility of the board to monitorboth non-financial and financial measuresof performance.

• Fifty-seven percent say their companiesare under increasing pressure to measurenon-financial indicators.

(2) Though companies are aware of thepitfalls of focusing exclusively onfinancial performance, the ability ofexecutives to measure and monitorperformance through non-financialmeasurements appears to beinadequate. Companies either do nothave or are not sharing critical non-financial performance data with theirboards.

• Most companies give themselves highmarks in terms of their ability to trackfinancial performance, with 87 percentdescribing their record as either excellent(43 percent) or good (44 percent). Bycontrast, only 29 percent describe theirability to track non-financial performanceas either excellent (5 percent) or good (24percent). Meanwhile, over a third (34percent) describe their non-financialrecords as merely fair (21 percent) or poor(13 percent).

• The quality of non-financial performancedata available to companies is inadequatein relation to the perceived need for it.Customer satisfaction, operationalperformance, innovation and employeecommitment are identified as key driversof performance. Yet only a minority ofcompanies describe the quality ofcorresponding information provided tothe board in these areas as excellent. Inmany cases, notably in the case of

employee engagement and innovation,more executives describe the quality ofinformation provided as poor comparedto excellent.

• The board is not the only entity that is “inthe dark” relating to non-financialperformance measurements. Significantpercentages of respondents say thatsenior management also needs betterinformation relating to such areas asemployee commitment (58 percent),customer satisfaction (48 percent),innovation (36 percent), the quality ofgovernance (35 percent), impact onsociety (32 percent), operationalperformance (31 percent) and supplychain/alliance partner performance (31percent).

• By contrast, only 20 percent ofrespondents see the need forimprovement in the reporting of financialresults. This highlights the point that evenamid significant dissatisfaction with thebreadth and quality of non-financialinformation, executives are largelysatisfied with the quality of their financialmetrics.

The 2004 survey found a similarly largegap between the perceived quality offinancial and non-financial indicators.While 86 percent said their company wasexcellent or good at measuring andmonitoring financial performanceindicators, only about one-third said theywere so at non-financial performancemeasures. Some 40 percent ratedthemselves average at measuring andmonitoring non-financial indicators, whilenearly a quarter called themselves fair orpoor. Almost half said the company’snon-financial metrics were ineffective inhelping the board and the CEO makelong-term decisions. About one-third saidnon-financial metrics were ineffective orhighly ineffective in helping directors andthe CEO with control and compliancematters.

Section IISurvey highlights

2

Survey highlights

* While the 2007 survey explores many of the issues examined in our 2004 report, the surveys were not identical; therefore, specific comparisons between thestudies would not be statistically valid. The findings are, however, remarkably comparable in magnitude.

(3) Despite the dissatisfaction with thequality of non-financial measurementsof performance, current impediments tothe broader use and greatersophistication of non-financialperformance metrics includeundeveloped tools, organizationalskepticism relating to the value of thesetools, unclear accountability for non-financial performance, time constraintsand the concern that such metrics mayconvey too much information tocompetitors. When asked to identify thetriggers most likely to spur theirorganization to reassess how itmeasures and monitors performance:

• Fifty-four percent of respondents say thata greater understanding of how tomeasure non-financial drivers ofperformance would spur a reassessmentof how their company measures andmonitors performance.

• Forty-five percent say that a sharp declinein customer retention or customersatisfaction—a near-crisis—would be atrigger to reassess the way their companymeasures and monitors performance.

• Forty-three percent say this reassessmentcould be triggered by a demand from aboard member or the CEO for greatervisibility and accountability.

• Other “events” that might prompt actioninclude: the competition for capitaldictating expanded reporting and morestringent control (22 percent); asignificant increase in competition (21percent); a major compliance failure (21percent); or a sharp decline in employeesatisfaction/retention (16 percent).

According to the 2004 report, the twobiggest obstacles to enabling the boardand senior management to track key non-financial vital signs of the business are thelack of developed tools for analyzing suchmeasures (59 percent) and skepticism thatsuch measures are directly related to the

bottom line (40 percent). No other barrierwas cited by more than about a quarterof the companies.

Overcoming the obstacles appears torequire significant changes in corporategovernance. Companies that wereexcelling at monitoring both theirfinancial and non-financial performancewere much more likely than companiesthat were struggling at this to do threethings well: a) believe that non-financialmeasures do affect company profitability;b) have board members and executiveswho are comfortable with andknowledgeable about non-financialmeasures; and c) combine good measureswith rewards.

(4) Nevertheless, in time a growingnumber of companies will improve thequality of their non-financialperformance measurements and adoptthem more broadly in the enterprise.

• Companies are feeling pressured toexpand their use of non-financialperformance metrics. But in addition, agrowing number of executives also seenumerous potential advantages topursuing non-financial performancemetrics.

For example, 37 percent say their company’sperformance is determined more byintangible assets/capabilities (e.g., employeeengagement, customer loyalty or innovativecapabilities) than by hard assets.

Similarly, 54 percent say forward-lookinginformation is of greater value tomanagement and the board than historicalinformation.

• Through internal and external forces,companies are being driven to increasethe emphasis on non-financialperformance measures.

When respondents were asked to rank themost important non-financial drivers ofcorporate performance, they chose, in orderof frequency of citation: Increasing

reputational risk; increasing customerinfluence; increasing global competition;increasing regulatory emphasis on non-financial measures; accelerating innovation;greater scrutiny of non-financialperformance measures by the media;increasing power of NGOs, lobbyists andcivic organizations.

In the 2004 report, the majority (73 percent)of the executives and board directors saidtheir companies were under increasingpressure to measure non-financialperformance indicators. Indeed, almost allthose surveyed said that a number of keyareas of their business in which healthcannot be measured in monetary termswere critical or important drivers of success:such as customer satisfaction (71 percent),product/service quality (62 percent),operational performance (52 percent), andemployee commitment (50 percent).

As companies gain experience with non-financial metrics, they discover a wide rangeof predictive, forward-looking managerialtools (a consequence detailed by thisreport’s accompanying interviews and casestudies).

The earlier survey also showed that therewas a growing mandate for better oversightof companies. Investors were placinggreater emphasis on sustainable long-termgrowth (72 percent), and there was arealization that forward-looking informationwas of greater value to management thanhistorical data (73 percent).

According to those interviewed in 2007, thevalue of non-financial metrics is even moreimportant than just a few years ago. Forexample, Jay Lorsch, a non-executivedirector at CA, Inc. and a professor atHarvard Business School, was interviewedfor both the 2004 and the 2007 reports.According to Mr. Lorsch, “While theemphasis is still too heavily skewed tofinancial results, there’s been a great deal ofprogress.” There are some leadingcompanies, says Mr. Lorsch, “who are usingmore and getting more value from non-traditional metrics.”

Section IISurvey highlights

3

Do current performance measurementprograms adequately inform and assist theboard and senior management in makingdecisions? Are financial metrics the bestmeans of driving performance? Could atighter focus on certain non-financialmetrics actually improve performance?Should companies seek a better balancebetween financial and non-financialmetrics? The survey results andaccompanying interviews show that themajority of companies are expanding theiruse of non-financial performance metrics.

By paying attention nearly exclusively tofinancial performance, says Martin Carver,Chairman, President and CEO of Bandag,Inc., an American supplier of tire products,many boards and executive teams misssome important insights. The fact is, saysMr. Carver, “it’s the non-financial metricsthat are probably more important than thefinancial metrics.”

For example, “What drives your cash flow?”Mr. Carver asks. “It’s your employeecommitment. It’s your customersatisfaction.” But the problem here, he says,“is that those things are extremely hard tomeasure and even more difficult to promoteor achieve.” Consequently, says Mr. Carver,many boards and management teams “havevery little insight into some of the mostinfluential processes in their businesses.”

A realization emergesBandag’s CEO is not alone in his views. Thesurvey reveals a strong desire to develop anduse non-financial performance metrics. Forexample, 83 percent of respondents say themarket itself increasingly emphasizes non-financial performance measures—a figurethat rises to 87 percent of respondents atcompanies with US$1billion or more inrevenues.

Closely related findings include:

• Over three-quarters (78 percent) of surveyrespondents say that financial indicatorsalone do not adequately capture theircompanies’ strengths and weaknesses.This figure rises to 85 percent ofrespondents among companies with overUS$1billion in revenues.

• Fifty-seven percent of survey respondentssay their companies are under increasingpressure to measure non-financialindicators. However, among non-executive directors, the figure falls to only37 percent.

• Sixty-nine percent of those surveyed saythat it is the responsibility of the board tomonitor both non-financial and financialmeasures of performance.

What’s driving the trend? The above statistics leave little doubt thatcompanies are under pressure to increasethe use of non-financial performancemetrics. The survey provided several reasonsfor this.

The survey tests executives’ broadperceptions of the most influential forcesbehind the trend. Asked to cite what theyview as the primary drivers behind themarketplace’s growing use of non-financialperformance metrics, the resulting list (inorder of frequency of citation) includes:

• Increasing reputational risk Forty-nine percent of respondents and 59percent of those whose companies haveannual revenues of over US$1billion—believe that companies are turning tonon-financial performance metrics to helpthem avoid damage to their reputations.

Section IIINon-financial metrics: The quest for greater insight

Non-financial metrics: Thequest for greater insight

4

Such damage can be real, says Dr. WalterMassey, President of Morehouse College inAtlanta, Georgia, and a member of theboard at British Petroleum, McDonald’s andBank of America. For example, according toDr. Massey, “there are more investmentfirms than ever before that are attachingimportance to non-financial performance.”So when it comes to areas such as businessethics, environmental stewardship orcorporate social responsibility (CSR), Dr.Massey believes that “if you don’t managethese issues, it can now have a direct impacton sales, investment and share price.”

As for the role of board members, Dr.Massey’s view is that “if they’re not takingthese non-financial objectives seriously, ifthey’re not reviewing performance in theseareas, then they’re not doing their job.”

Still, Dr. Massey is quick to point out that inhis experience most companies arebeginning to “get it.” As he explains, “Theexecutives I know are paying much closerattention to these issues. They either havecommittees dedicated to these issues, orthey’re getting them organized.”

• Increasing customer influence The next most influential force is thedegree to which customers are gaininginfluence in the marketplace, a drivercited by 40 percent of respondents.Thanks in part to the Internet, customershave greater power than before, andcompanies are finding they need to learnmore about the customer’s needs anddesires. In addition, says Dr. Massey, “theranks of the ecologically minded, sociallyminded consumer are growing, andcompanies run considerable risks if theydon’t pay attention.”

• Increasing global competition Thirty-eight percent of respondentsbelieve that increasing global competitionis one of the principal drivers. Forexample, with so many international anddomestic companies now competing fortalent in China, Elizabeth Martin-Chua,SVP HR for Philips China, says that hercompany is now looking more closely atissues in human capital management.

“Financial performance is very important,and we discuss this with our managers andit is in their performance review” says Ms.Martin-Chua. But with talent acquisitionand retention becoming criticaldeterminants of success, “we are spendingmuch more time discussing people issues.”

Here, says Ms. Martin-Chua, “it is veryimportant that there is a process and thatmanagers engage in the process.” So thecompany conducts regular reviews withevery manager “and we make a point to askwhat they are doing with their people? Arethey retaining their people? How is theirrecruiting and development? What is thesituation?”

Ms. Martin-Chua says it is challenging butessential to make non-financial issuesmatter. “But the way to make this work isto be consistent and to make it important tothe managers.” She says that withreinforcement, “we are able to keep thisnon-financial goal on the managers’agenda”.

• Increased regulatory emphasis on non-financial measures Nearly a third of theexecutives surveyed (32 percent) believeregulators are causing companies to paymore attention to non-financialperformance metrics. The figure rises to37 percent for respondents fromcompanies with over US$1billion inrevenues. Here, says Mr. Lorsch, “there iscertainly a trend toward greater visibility.”

Adds Pedro Reinhard, the former EVP andCFO of Dow Chemical and now a memberof the board at Dow Chemical, Royal Bankof Canada, Colgate-Palmolive and Sigma-Aldrich, “Regulators and investors arealways going to want more information;more transparency.” But he asks, “Just howuseful is this additional reporting?” adding,“Isn’t there a point where you’re just givingtoo much information to the competition?”


5

Note that forty-nine percent of executive directors say thatreputational risk is a primary driver, compared to only 38 percent ofnon-executive directors. Similarly, over a third of executive directors,35 percent, view increased media scrutiny of non-financialperformance as a critical driver, compared to only 13 percent of non-executive directors. The conclusion: it appears that non-executivedirectors severely discount reputational risk.

• Accelerating innovation Twenty-nine percent of respondents saythat the need to make more innovativeproducts and services is another forcebehind the increasing interest in non-financial performance metrics. But J.Marvin Quin, SVP and CFO at AshlandInc., a diversified chemical company, saysfinding the right metrics is a continuingchallenge. “We’re trying to do more tomeasure and promote innovation,” heexplains. For example, “We are looking atthe percentage of products sold that arenew and using that to see howaggressively we are refreshing andupdating our products.”

Admittedly, says Mr. Quin, though themeasure creates a useful index, it is notnecessarily a precise instrument. “We haveto be careful using this in comparison tocompetitors because the ways companiesdefine new products tends to differ.” Is aproduct change developed for and deliveredto a single customer a new product or isthat just a differentiation? “There’s a lot ofgrayness,” says Mr. Quin, “so you have todefine what you mean, what you’re lookingfor, and look very closely at the results.”

• Greater scrutiny of non-financialperformance measures by the mediaTwenty-six percent of respondents viewexpanding media coverage of non-financial performance as anothersignificant driver. Increasingly, says Dr.Massey, “media and the business pressare providing a lot more structured andin-depth coverage of non-financial issuessuch as ethics and social responsibility.”Negative publicity in such areas can do“real harm” to a company; conversely,positive press coverage can boost thebottom line.

• Increasing power of NGOs, lobbyists andcivic organizationsClosely related to the growing influenceof socially minded consumers, 16 percentof respondents feel these CSR-orientedgroups create incentives for companies tomeasure and manage related issues.

But this is not to say that all executivesbelieve that outside pressure is drivingcorporations to do more to measure thisarea. As Debbie Whitaker, Group Head,People Product Management at StandardChartered Bank explains, “We’ve alwaysbeen a very diverse organization, but abouta year ago, we started a much morestructured approach to both trackinggender or various nationality groupings andincreasing the diversity of our talent pools.”

However, says Ms. Whitaker, the motivationhas nothing to do with outside pressure.“We do this not because anyone’s telling uswe have to—we’re doing it because webelieve it not only will make us a strongercompany, it’s just the right thing to do.”

Other forces Of course, there are additional driversbehind the increasing use of non-financialperformance metrics. One of the mostprominent, says David Norton, SVPRelationship Marketing at Harrah’sEntertainment, “is the way that morecompanies are realizing how non-financialmetrics drive financial performance.”

For example, perhaps nowhere is thegrowth of customer power more evidentthan in the casino business. “Success in ourbusiness,” says Mr. Norton, “depends on

meeting or exceeding the expectations ofour customers. If we don’t, they gosomewhere else. So yes, we’re customer-focused.”

Certainly, financial indicators have theirplace, says Mr. Norton. But what hiscompany has learned “is that the ways wecapture, analyze and respond to trends incustomer data are absolutely critical to ourperformance.” For example, “for a numberof years now, we’ve been collecting andstudying customer satisfaction data in a lotof detail: differentiated by business unit, bytiers of customers and by other criteria.”

What the company is learning, says Mr.Norton, “is that things like the grades weassign to customer satisfaction, based on allthat detail, are a better predictor of earningsfrom an individual customer or for abusiness unit than almost anything elsewe’ve considered. Our revenues directlycorrelate to our customer satisfaction.”

Armed with these insights, Harrah’s turns itscustomer data into actionable intelligence.For example, “If we see scores falling at aparticular property or if we notice a dropamong a certain tier of customers, theproperty managers or the customer servicedirectors can see that and can respondaccordingly.” So in effect, says Mr. Norton,“this customer data is a very practicalleading indicator, something we can use toimprove the customer experience.” That inturn, says Mr. Norton, “drives ourrevenues.”

6


The number of respondents saying innovation needs are driving theuse of non-financial metrics is slighter higher (32 percent) atcompanies with under US$1billion in revenue; slightly lower (27percent) at companies with over US$1billion.

The survey and accompanying interviewsshow that non-financial performancemetrics are becoming more important—even vital in some cases. It should follow,then, that managers and board membersare enhancing their efforts to identify, trackand benefit from such measures.

On the contrary, the survey instead reveals asignificant gap between the statedperceived importance of non-financial goalsand objectives and the correspondingpractices for tracking and managing non-financial performance metrics. Our researchin 2004 found the same disconnectbetween rhetoric and reality.

The non-sequitur There can be no doubt that executivesperceive the growing importance of non-financial metrics. The previous section ofthis report reveals that a majority of surveyparticipants believe that: (a) the marketplaceis emphasizing non-financial performancemeasures; (b) financial indicators do notadequately capture all of a company’sstrengths and weaknesses; and (c) boardsshould be held responsible for tracking bothfinancial and non-financial performance.

Accordingly, the survey results would beexpected to show that organizations areenhancing their ability to measure, trackand manage a broad range of non-financialgoals and objectives.

But in fact, the survey shows thatcompanies continue overwhelmingly tofocus primarily on financial objectives andmetrics.

For example, respondents were asked torate their organization’s record of measuringand monitoring financial and non-financialaspects of performance. Regarding financialperformance, most companies surveyedgave themselves high marks, with 87percent describing their record as eitherexcellent (43 percent) or good (44 percent).

But in stark contrast, regarding themeasuring and monitoring of non-financialperformance, only 29 percent describe theirrecord as either excellent (5 percent) orgood (24 percent). Furthermore, 34 percentdescribe their records as merely fair (21percent) or poor (13 percent).

These findings are not surprising, saysBandag’s Mr. Carver. Executives, he explains,“tend to focus on financial metrics becausethat’s the easy thing to do.” The problem,says Mr. Carver, is endemic. “Everyoneseems to have this idea that accounting is ascience, and so you can measure resultsquarter to quarter with precision tosomehow see where you’re going long-term.”

But according to Mr. Carver, businessperformance over the longer term “issubject to competition and chaos.” So whilecash flow and profits provide insights intothe immediate and short-term health of abusiness, Mr. Carver maintains that suchfinancial details tell a board or a company’sinvestors very little about the long-termprospects.

Ultimately, says Mr. Carver, “It’s the non-financial performance metrics—employeecommitment, effectiveness, and passion,customer delight and loyalty and the othersorts of process indicators that accountantshaven’t learned to measure—that can giveyou a better prediction of the long-term andsustainable competitive advantage.”

Section IVThe current state of oversight

7

The current state ofoversight

0% 20% 40% 60% 80% 100%

Average

Fair

Good

Excellent

Don’t know

Poor

42.69%4.65%

43.86%24.42%

12.28%36.63%

1.17%20.93%

0%13.37%

0%0%

Financial performance Non-financial performance

16. How would you rate your organization’s record of measuring and monitoring financial and non-financial aspects of performance?

Recognition but no action What the above statistics and commentarybegin to show is that many companies haveyet to align their practices with their beliefs.Though the majority of respondents saynon-financial metrics are becoming moreimportant, many if not most still treat thedevelopment, monitoring and disseminationof non-financial metrics as an afterthought.

For a more detailed view of thisphenomenon, compare those areas deemedkey drivers of success with the quality ofcorresponding information shared with theboard.

The greatest numbers of respondents (65percent) say financial results are importantdrivers of success. So it is no surprise that 68percent describe the quality ofcorresponding financial information sharedwith the board as excellent.

But certain categories of corporateperformance rank highly on respondents’lists as drivers of success, including customersatisfaction (52 percent), operationalperformance quality (38 percent) andemployee commitment (23 percent). That is,respondents recognize these are importantdrivers. Nonetheless, most executives saytheir boards are not receiving information ofcommensurate quality—and certainly theyare not receiving the quality of informationbefitting a key driver of corporate success.In other words, there is recognition of theopportunity, but little action. (See Table A1and A2.)

Table A1 It may drive success, but the board doesn’t see it….

A side-by-side comparison shows that while companies gives themselves high marks for thequality of financial information provided to the board, the self-assessment scores fall sharplywhen it comes to the quality of non-financial metrics.

Quality of corresponding information shared with the board

At the largest companies, those with revenues over US$1billion, the disconnect between keydrivers of success and the quality of information shared with the board becomes even larger.(In particular, note customer satisfaction and innovation.)

Table A2Companies with revenues over US$1billion

0% 20% 40% 60% 80% 100%

Operational performance (38%)

Innovation (28%)

Customer satisfaction (52%)

Financial results (65%*)

Employee commitment (23%)

Product service quality (31%)

68%28%

2%

Excellent Average Poor

23%47%

23%

30%49%

16%

19%48%

23%

26%55%

11%

12%50%

29%

* Percentages in this column = number of executives citing this category of performance as a key driver of success (Q9/Q14)


8

0% 20% 40% 60% 80% 100%

Operational performance (43%)

Innovation (29%)

Customer satisfaction (46%)

Financial results (67%*)

Employee commitment (28%)

Product service quality (28%)

70%25%

1%

Excellent Average Poor

19%43%

26%

32%44%

16%

12%55%

22%

26%52%

13%

9%45%

31%

* Percentages in this column = number of executives citing this category of performance as a key driver of success (Q9/Q14)

PrioritizationThe board may not be the only part of thecompany operating in the dark. When itcomes to non-financial performancemeasurements, the survey reveals thatsenior managers may also need betterquality information.

In particular, significant percentages ofsurvey respondents say senior managersneed better information in such areas asemployee commitment (58 percent),customer satisfaction (48 percent),innovation (36 percent), the quality ofgovernance (35 percent), impacts on society(32 percent), operational performance (31percent) and supply chain/alliance partnerperformance (31 percent). (Companies withrevenues of over US$1billion place particularemphasis on the need for better informationregarding employee commitment (64percent) and customer satisfaction (56percent).

By contrast, only 20 percent of respondentssee the need for improvement in thereporting of financial results. This againhighlights that even amid significantdissatisfaction with the breadth and qualityof non-financial information, executives arelargely satisfied with the quality of theirinformation related to reporting financialresults.

Financial vs. non-financial performancemetrics

The survey clearly shows that informationneeds are not being met. Executives wereasked whether their company’s financialmetrics were effective in supporting theefforts of the board and seniormanagement to achieve various businessobjectives. In virtually every case, asignificant number of respondents said theirfinancial metrics were not effective.

Would non-financial metrics therefore helpto close the gap? Surprisingly, the surveysays no. Asked the same question aboutnon-financial metrics, similar percentages ofexecutives said these measures were noteffective in terms of supporting the boardand senior management. The full results areshown in the accompanying table:

0% 10% 20% 30% 40% 50% 60%

Employee commitment

Customer satisfaction

Quality of governance and management processes

Financial results

Innovation (i.e., success in developing new products/services)

Quality of relationships with external stakeholders(supply chain and alliances)

Impact on society and the environment

Brand strength

Ability to withstand terrorist attacks and other post 9/11 threats

Other, please specify

Don’t know

None of the above; the quality of information is good in all areas

Product/service quality

Operational performance(efficiency and effectiveness of key business processes)

15. Are there any areas in which you feel your company’s senior management needs better quality information than it now receives?

20%

35.43%

57.71%

48%

30.86%

26.29%

36%

30.86%

32%

29.71%

0.57%

0.57%

16%

4.57%

Select all areas where better information is needed.


9

0% 20% 40% 60% 80% 100%

Short-term decision making

Mid-to long-termdecision making

Achievement of appropiatecapital market valuation

Control and compliance

Strategy formulation

Board/Senior ManagementChallenge

Percentage of executives sayingthese metrics are ineffective

50%51%

27%23%

16%29%

33%40%

44%47%

Financial metrics Non-financial metrics

Table BThe metrics reviewed by board/senior management need to be more helpful inaddressing board/senior management challenges.


10

Lack of confidence in metricsIt is noteworthy that across a broad range ofimportant issues, a significant percentage ofexecutives express little confidence in theability of their performance metrics toinform them about their companies’ healthand aid decision-making by seniormanagers.

For example, 58 percent say that their seniormanagement and board have no accurateor reliable means of benchmarking non-financial performance against competitors.Neither these executives’ companies’financial nor their non-financialperformance metrics (nor the two intandem), are proving effective.

Similarly, 56 percent say that the combinedstrength of their company’s financial andnon-financial performance metrics fails toinform and aid the board and seniormanagement in terms of the futureprospects of the company’s partners.Meanwhile, 41 percent say their metrics arenot effective at conveying even the currenthealth of the company’s partners.

Perhaps most startling of all, 53 percent saythat even when combined, their financialand non-financial performance metrics arenot effective at providing the board andsenior management with insight relating totheir own company’s future prospects.Twenty-one percent say their performancemetrics are not effective even whenproviding information to the board andsenior management relating to thecompany’s own current health.

0% 10% 20% 30% 40% 50% 60%

The current health of partners of the organization(allies, suppliers, etc.)

The future prospects of partners of the organization(allies, suppliers, etc.)

The company’s future prospects

The company’s current health

None of the above; the metrics are effective in all areas

Don’t know


The company’s performance in non-financialareas relative to its competitors

The company’s financial performancerelative to its competitors

17. Do you feel your company’s financial and non-financial performance metrics are not effective in providing an accurate and reliable indication to your board and senior management in any of the following areas?

21.14%

52.57%

40.57%

56%

26.86%

58.29%

6.29%

0.57%

0%

Select all areas where performance metrics are not effective.

11

Section VRedefining performance measurement and governance: The way forward

The research presented so far might besummarized in three observations:

(1) Executives perceive the growingimportance of non-financialperformance metrics.

(2) Executives see a gap between theircurrent needs and their capabilitiesrelated to non-financial metrics.

(3) Executives see room for improvement inboth their non-financial and, to a lesserextent, their financial reportingperformance metric programs.

This final section examines some of thereasons for this gap in capabilities, thenprovides evidence from both the survey andinterviews to chart a way forward.

What are the barriers? There are numerous reasons why companieshave been unable to accomplish more interms of supplying their boards with betternon-financial performance measures.According to the survey, the most obviousof these include:

• Undeveloped tools. Fifty-five percent of respondents say thatthe tools for analyzing non-financialmeasures at their companies are not asdeveloped as their financial counterparts.

• Skepticism. Forty-eight percent of respondents saythat people in their companies areskeptical that non-financial metricsdirectly affect the health of theircompanies.

• Accountability. Forty-four percent of executives in thesurvey say that establishing clearaccountability for non-financialperformance metrics is difficult.

• Lack of familiarity. Forty-one percent say management is toounfamiliar with non-financial measures;and an equal percentage of respondentssay the same of board members.

• Lack of benchmarking data. Twenty-one percent say their use of non-financial performance metrics is inhibitedby a lack of comparable data fromcompetitors.

• Time constraints. Nineteen percent of executives say thatsenior management and the board lackthe time needed to feel comfortable usinga new set of metrics.

• Competitive concerns. Six percent of respondents say that theyworry that competitors might gainvaluable intelligence from non-financialperformance metrics.

As daunting as the above list may seem,executives were also asked what might spurtheir own organizations into reassessinghow they measure and monitorperformance. Ironically, the most frequentlycited trigger, noted on 54 percent ofrespondents’ lists, is the achievement of agreater understanding of how to measurenon-financial drivers of performance. Inother words, if companies knew better howto measure non-financial indicators, theywould focus more on them. But they wouldhave to focus more attention on them ifmeasurements were to improve.

Redefining performancemeasurement and governance:The way forward

The difficulty in developing metrics, saysStandard Chartered Bank’s Ms. Whitaker, isnot a good enough reason to do nothing atall. “We often hear people saying theywon’t share their human resources data forcompetitive reasons,” she explains. “Butwhat I suspect is that this is just an excuse.The truth is, the company probably doesn’thave the data or doesn’t know how to trackit, and if I were on the board, that wouldn’tsit well.”

Other events that might spur a closer lookat current reporting and performanceframeworks include a sharp decline incustomer satisfaction or retention (45percent), as well as board members or theCEO demanding greater visibility andaccountability (43 percent). Final items onthe list of “events” that might promptaction include: the competition for capitaldictating expanded reporting and morestringent control (22 percent); a significantincrease in competition (21 percent); amajor compliance failure (21 percent); or asharp decline in employeesatisfaction/retention (16 percent).

But practices are improving Regardless of the barriers and of thecircumstances under which companiesbelieve they might take action, changes arebeing felt.

Many of the interviewees for the report saythat their companies are making great stridesin learning how to derive value from non-financial performance metrics.

Maybe these represent situations whereboards and management teams areobtaining improved information relating tothe various non-financial drivers of successidentified by the survey.

For example, Ashland’s Mr. Quin says that hiscompany is learning that by managingcustomer satisfaction, his company canachieve stronger revenues and profits. Butthe challenge was one of defining anappropriate index. As Mr. Quin explains,“Everyone talks about how customers feel,but what you need is a way to measure thatin a consistent and meaningful way.”

Consequently, his company has devised whathe calls the OTAC index. “That stands for on-time, accurate, and complete—which we’vefound to be an excellent proxy for customersatisfaction in our distribution business.” Bymanaging OTAC, he explains, “we have anidea of how we’re doing with our customers,and that will translate into financial resultsdown the road.”

Similarly, consider the importance placed onnon-financial metrics at South Africa’slargest consumer retailer, Edcon. About sixyears ago, explains Group HR Director UrinFerndale, “we were experiencing financialdistress.” Other executives might havefocused on cutting costs, says Mr. Ferndale.But “our CEO decided that instead we weregoing to grow the business out of trouble—and he believed the only way to do thatwould be to renew our focus on ourpeople.”

So immediately, “twenty percent of thestated performance goals of every singlesupervisor became people-oriented,” saysMr. Ferndale. Then, even as the company’sfinancial performance began to improve,


12

24. Which triggers are most likely to spur your organization to reassess how it measures and monitors performance?

Select up to three triggers.

0% 10% 20% 30% 40% 50% 60%

Board members or the CEO demands greatervisibility and accountability

Sharp decline in customer satisfaction/retention

Competition for capital dictates expandedreporting and more stringent control

Greater understanding of how to measurenon-financial drivers of performance

Introduction of a breakthrough product/service by a competitor

Significant increase in customer power


Significant increase in competition

Major compliance failure

Significant security threat (such as terrorist attack)

Public relations crisis

Sharp decline in employee satisfaction/retention

53.71%

21.71%

43.43%

16.0%

21.14%

44.57%

14.29%

9.14%

17.14%

21.14%

2.86%

0.57%

When it comes to fostering accountability for customer satisfaction,the survey detected significant discrepancies in perceptions betweenexecutive directors, non-executive directors and senior managers.Fifty-one percent of non-executive directors say their companiesreward managers for good performance in this area. However, thefigure falls to 37 percent among executive directors and then to 22percent among senior managers.


13

the focus on people management continuedto increase to the point where today,“around 50 percent of performance goalsare people-focused.”

What the company now knows is that in itsindustry, there is a high correlation betweenrevenue growth and employee engagementmeasures. “As we increased the peoplecomponent in the evaluations,” says Mr.Ferndale, “and as employee engagementimproves, we’ve grown sales andprofitability.” For example, in 2000, thecompany’s staff turnover exceeded 30percent and its ROE was less than 6 percent.Today, says Mr. Ferndale, “our staff turnoveris around 11 percent, and our ROE is over40 percent.”

In addition, not only is the company arecipient of rewards relating to being an“employer of choice”; today, Edcon’s board iswell-informed on people issues. Mr. Ferndaleis in fact a member of the managementcommittee. Ultimately, says Mr. Ferndale,“our company is an example of where afocus on people, on non-financialperformance metrics, actually improves ourfinancial performance—and we have thegraphs and overlays to prove it.”

Non-financial indicators are theresponsibility of management

When executives were asked who shouldmonitor the financial results of thecompany, 80 percent said that the boardand management should shareresponsibility. When they were asked aboutspecific non-financial indicators, however,they said that in most cases monitoringshould be done by senior managers, exceptinnovation where more people said that themonitoring should be shared.

Many interviewees add that non-financialmeasurements are more relevant forindividual activities and financialmeasurements are important for thecompany as a whole.

Consider the example of Administaff, aprovider of personnel management services,based in Houston, Texas. According toAdministaff Chairman and CEO Paul J.Sarvadi, “Depending on where you fit in theorganization, that will determine how muchof your performance incentives arefinancially or non-financially oriented.” Forexample, “If you’re near the executive area,more of your compensation is based ontotal financial results and not tasks,” heexplains. But the further down you go intothe organization, “the higher thepercentage of your income is determined bynon-financial metrics.”

Ashland’s Mr. Quin concurs. “If you look atour proxy, you’ll see how the top fiveexecutives are compensated, and it’s allabout financial metrics: ROI, sales, profitgrowth.” But moving deeper into theorganization, “you’ll see we have hundredsor maybe even over 1,000 people who areinvolved in some form of incentivecompensation.” Here, says Mr. Quin, “themetrics reflect objectives for individuals.”While many of the metrics are still financialin nature, “the further down you go, themore importance you’ll see attached to thenon-financial performance.”

Table CWho should monitor?

0% 20% 40% 60% 80% 100%

Operational performance

Innovation

Customer Satisfaction

Financial results

Employee commitment

Product service quality

14%6%

80%

Senior Management Board Both

52%10%

38%

51%14%

34%

39%18%

44%

62%13%

25%

61%8%

30%

0% 20% 40% 60% 80% 100%


Innovation

Customer Satisfaction

Financial results

Employee commitment

Product service quality

49%11%

40%

Senior Management Board Both

68%13%

19%

69%11%

20%

51%19%

30%

71%13%

16%

71%14%15%

Table DWho should take primary responsibility?

A few details of current practice

What a company measures and rewards drives the performance it will obtain. Thefollowing tables offer a view of the most commonly tracked areas of incentives alongwith examples of specific metrics.

20. In which of the following areas of performance does your board hold management accountable by rewarding them for good performance?

Select all areas for which management is rewarded.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Employee commitment


Quality of governance andmanagement processes

Financial results

Innovation (i.e., success in developingnew products/services)



Brand strength



Operational performance (efficiency andeffectiveness of key business processes)

84.39%

26.01%

24.86%

35.84%

47.40%

32.37%

23.70%

10.98%

8.67%

10.98%

1.73%

21. In which of the following areas of governance and management processes does your board or senior management use identifiable performance metrics to run the company?

Select all that apply.

0% 10% 20% 30% 40% 50%

Performance of individual board members

Quality of strategic decision-making

Overall quality of board performance

Quality of governance structure (i.e., board composition, roles and responsibilities, etc.)

Quality of risk management and internal controls

None of the above; we do not measuregovernance and management processes

Don’t know


Information technology and other technologies

Operational efficiency

28.90%

27.17%

25.43%

49.71%

27.75%

30.06%

34.68%

13.29%

8.09%

0%


14


15

22. In which of the following areas of employee commitment does your board or senior management use identifiable performance metrics to run the company?


0% 10% 20% 30% 40% 50%

Competitiveness of compensation and benefits

Quality of development and learning programs

Retention levels

Success of recruitment practices

Fairness of employment terms and conditions

Quality of health and safety provisions

Levels of employee commitment

None of the above; we do notmeasure employee commitment

Don’t know


Levels of diversity

Quality of internal communications

29.48%

50.29%

43.93%

21.39%

23.12%

24.28%

26.01%

23.70%

28.90%

2.31%

0%

13.87%

23. In which of the following areas of customer satisfaction does your board or senior management use identifiable performance metrics to run the company?


0% 10% 20% 30% 40% 50% 60%

Satisfaction with pricing levels

Quality of service delivery

Satisfaction with product quality

Satisfaction with new products/services

None of the above; we do notmeasure customer satisfaction

Don’t know


Customer loyalty

Economic value of customer to the company

37.93%

57.47%

40.80%

23.56%

37.36%

56.90%

13.22%

3.45%

0%

0% 20% 40% 60% 80% 100%



Quality of governance

Financial results

32%35%

32%34%

41%37%

76%73%

Non-executive directors Executive directors

Table EIn your role, select the three areas commanding the greatest share of your attention.

Another example of fresh thinking in theuse of non-financial performance metricscomes from Administaff. According toAdministaff Chairman and CEO Paul J.Sarvadi, financial metrics have their place.But financial results, he insists, are simplythe means of keeping score of businessresults. “To manage financial results, youfirst need to identify, understand andmanage the underlying drivers of financialperformance,” says Mr. Sarvadi.

For example, “one of the things investorswant to know about is revenue growth,”says Mr. Sarvadi. “But if you back up fromthe revenue, what drives that number is oursales and our retention of customers.” Sothe “bow of the ship” says Mr. Sarvadi, “isour service satisfaction numbers” alongside“the number of trained and capable salesrepresentatives.” Those two pieces ofinformation, Mr. Sarvadi insists, “are theprecursors to what’s ahead in financialperformance.” (Not surprisingly, says Mr.Sarvadi, “customer satisfaction is becominga more important piece in incentivecompensation.”)

As companies gain experience with non-financial metrics, they might discover a widerange of predictive, forward-lookingmanagerial tools. But of even greater value,says Ms. Whitaker, are non-financial metricswhich are not only predictive, butactionable.

“We’ve done considerable research, and ourdata tells us that profit margin andcustomer satisfaction are intimately relatedwith employee engagement,” explains Ms.Whitaker. “So when we see highly engagedteams, we know they’re going to be high-performing on a range of businessmeasures, including revenue and profitmargin growth, productivity and employeeretention.”

Consequently, says Ms. Whitaker, thecompany can translate the predictiveproperties of employee engagement metricsinto actions that drive profits. “We can seewhere there could be trouble,” says Ms.Whitaker, but even more importantly, “wecan be proactive. We know that managershave the biggest impact on teamengagement. So we’ve studied what ourbest managers do that sets them apart andthen try to repeat that throughout the bankthrough selection and development.” Sonon-financial metrics, concludes Ms.Whitaker, “are a very powerful tool.”

The way forward:The potential value and role of non-financial metricsA key theme of this report is that a growingnumber of executives suspect that theremay be undiscovered value in non-financialmetrics. For example, one potential role fornon-financial metrics is the advancement ofpredictive capabilities.

Consider the following. Among surveyrespondents, 37 percent say their company’sperformance is determined more byintangible assets/capabilities than by hardassets. For example, employee engagement,customer loyalty or innovative capabilities(or some combination) might be theprincipal drivers of a company’s value.

Similarly, 54 percent say forward-lookinginformation is of greater value tomanagement and the board than historicalinformation. Again, what if a decline incustomer loyalty precedes financial distressby many months? Or alternatively, what ifimprovements in innovation measures couldbe shown to be highly correlated withmedium-term financial gains?


16

0% 20% 40% 60% 80% 100%

Investors are placing greater emphasis on sustainable, long-term growth

Forward-looking information is of greater value to management and the board than historical information

Financial indicators alone do not adequately capture our company's underlying strengths or vulnerabilities

Our organization is under increasing pressure to measure non-financial performance indicators

Select all statements with which you agree.

Our company's performance is determined more by intangible assets/capabilities than by its hard assets

7. With which of the following statements regarding non-financial performance indicators do you agree?

56.57%

78.29%

48.57%

53.71%

It is the responsibility of the board to monitor both non-financial and financial measures of performance

37.14%

68.57%

Though numerous intervieweesrelate successes in this area, only14 percent of non-executivedirectors and 27 percent ofexecutive directors citeemployee commitment as one of the “top three” priorities.


17

A word of cautionA number of interviewees doubted therewas a magic bullet for corporate insight.One such is Dow’s Mr. Reinhard. While theexecutive understands that non-financialperformance metrics have their place, ingeneral he offers caution.

“Non-financial metrics can be important oreven very important depending on whattype of industry and what type of businessyou are in.” For example, at Dow “we wereusing global surveys of employeeengagement, motivation and performancefor over 10 years.” These surveys, says Mr.Reinhard, “were very useful and they helpedus to improve our performance.” However,“I don’t believe this information was ofmuch use to shareholders and it certainlywas nothing I wanted to share with ourcompetitors.”

Similarly, says Mr. Reinhard, “you can’t go toshareholders and say, here, this is a newbusiness strategy and it’s based completelyon non-financial performance metrics. Yourshareholders need to see financial resultsalong the way to the achievement of a long-term business strategy. So sooner or later,your non-financial ideas have to translateinto tangible, financial returns.”

The best approach: use bothIn the end, Mr. Reinhard maintains, what’scalled for is an analysis of what “works.” Inmany cases, companies will indeed findthere are uses for non-financial metrics.However, says Mr. Reinhard, “I don’t believethey should ever completely take over. Theycan be part of a balanced strategy; they aresomething you can maybe use to steer thebusiness; but they will not and should notcompletely replace financial performance.”

In this regard, Ashland’s Mr. Quin—alongwith nearly all of our interviewees—agrees:

“Financial performance metrics are theultimate results for the business. Non-financial metrics can give you insight, anidea of what’s driving the results. Andthere’s no question, this kind of insight ishard to develop.

“But the real trick here from a governancepoint of view is that you need a blend ofboth. As a director you need to know bothfinancial and non-financial metrics to get atrue picture of what’s happening in thecompany and the marketplace. And if youroperations aren’t giving you solid non-financial reporting, if they’re not giving youan idea of what drives the results, then youneed to know why—you can’t operate inthe dark.”

As with the 2004 study, this latest researchagain reveals a critical fault line betweenrhetoric and reality in the boardrooms ofsome of the world’s leading companies.Many boards and executives are still in thedark about the health of their businesses.Non-financial factors are widely regarded asextremely important drivers of success for acompany, yet in most cases they receiveconsiderably less attention than financialdata from the board and senior managers.

The reasons for such a mismatch are easyenough to list. Reliable non-financialperformance metrics—reliable in the sensethat they absolutely correlate to financialperformance—are difficult to discern.Consistently tracking such “soft” issues asemployee engagement, innovation orcustomer satisfaction is viewed as more artthan science. Financial metrics seem moresolid and familiar. Naturally, there isresistance.

Conclusions

Interviewees

1. Martin G. CarverChairman, President and CEOBandag Incorporated

2. Urin FerndaleGroup HR Director and Member of the BoardEdcon

3. Jay LorschDirector; Chair of the Corporate Governance CommitteeCA Inc.Harvard Business School: Louis E. Kirstein Professor ofHuman Relations

4. Elizabeth Martin-ChuaSVP HRPhilips China

5. Dr. Walter MasseyPresident, Morehouse CollegeMember of the Board: McDonald’s, British Petroleum, Bankof America

Section VIConclusions

18

But the signs of change first detected in the2004 study are still in evidence today.Companies such as Harrah’s Entertainment,Standard Chartered Bank, Edcon, or RoyalBank of Canada are scoring visible successesby more closely tracking and managing non-financial performance metrics. Many morecompanies are including non-financial datain their annual reports or their shareholderbriefings. Compensation structures continueto evolve to include non-financial targets.

So certainly, board members are becomingincreasingly aware of the potential value ofnon-financial metrics. Many are becomingmore vocal; many are applying lessonslearned.

Still, the statistical findings of this reportraise some red flags. Boards andmanagement teams by their own admissionsee that the information they need is notthe information they are receiving. So as thislatest report on the state of non-financialreporting reveals, there is much more workto be done.

6. David NortonSVP Relationship MarketingHarrah’s Entertainment

7. J. Marvin QuinSVP and CFO Ashland Inc.

8. Pedro ReinhardBoard of Directors: Dow Chemical, Royal Bank of Canada, Colgate-Palmolive, Sigma-AldrichEVP and CFO Dow Chemical (retired 2005)

9.Paul J. SarvadiChairman and CEOAdministaff

10.Debbie WhitakerGroup Head, People Product ManagementStandard Chartered Bank

Questionnaire

0% 10% 20% 30% 40% 50%

No

Yes, I’m both an executive and non-executive board member

Yes, I am a non-executive board member

Yes, I am an executive board member

1. Are you a member of a corporate board?

40.46%

21.39%

7.51%

30.64%

0% 10% 20% 30% 40% 50%

Canada

Italy

United Kingdom

United States

Spain

Australia

China

Other

India

Germany

2. In what country are you personally based?

24.14%

8.05%

5.75%

5.75%

4.60%

4.60%

3.45%

2.30%

2.30%

39.08%

0% 10% 20% 30% 40% 50%

North America

Latin America

Asia-Pacific

Europe

Refer to the company on whose board you sit, if you are a board member.

Middle East & Africa

3. Where is your company headquartered?

36.84%

14.62%

41.52%

2.92%

4.09%

20

Section VIIQuestionnaire

21


0% 5% 10% 15% 20% 25%

CEO/COO/President/Managing director

CFO

Non-executive director

Chairman

Chief risk officer

Chief strategy officer/head of strategy

Other C-level executive

Other senior manager

Other

CMO/head of marketing/head of sales

CIO/CTO

4. What is your title?

6.29%

12%

19.43%

16%

5.14%

4.57%

1.71%

2.86%

8%

21.14%

2.86%

0% 5% 10% 15% 20% 25%

$1bn to $5bn

$5bn to $10bn

$500m to $1bn

$500m or less

$10bn or more

5. What are your organization’s global annual revenues in US dollars?

25%

24.42%

20.35%

12.21%

18.02%

0% 5% 10% 15%

Chemicals

Construction and real estate

Automotive

Agriculture and agribusiness

Education

Energy and natural resources

Entertainment, media, and publishing

Financial services

Government/public sector

Healthcare, pharmaceuticals,and biotechnology

IT and technology

Logistics and distribution

Manufacturing

Professional services

Retailing

Telecoms

Transportation, travel, and tourism

Defense and aerospace

Consumer goods

6. What is your primary industry?

1.14%

4.57%

3.43%

4.57%

5.71%

0.57%

1.71%

6.86%

3.43%

16%

3.43%

8.57%

10.29%

0%

7.43%

6.86%

4.0%

6.86%

4.57%

22


0% 20% 40% 60% 80% 100%

Investors are placing greater emphasis on sustainable, long-term growth

Forward-looking information is of greater value to management and the board than historical information

Financial indicators alone do not adequately capture our company's underlying strengths or vulnerabilities

Our organization is under increasing pressure to measure non-financial performance indicators

Select all statements with which you agree.

Our company's performance is determined more by intangible assets/capabilities than by its hard assets

7. With which of the following statements regarding non-financial performance indicators do you agree?

56.57%

78.29%

48.57%

53.71%

It is the responsibility of the board to monitor both non-financial and financial measures of performance

37.14%

68.57%

0% 20% 40% 60% 80% 100%

No

Yes

8. Do you believe there is inceasing emphasis in the marketplace on non-financial performance measures?

If yes, what do you think is driving the increased emphasis on non-financial performance measures?

83.24%

16.76%

0% 20%10% 40%30% 50%

Greater scrutiny of non-financial performance measures by the media

Increasing power of NGOs, lobbyists, and civic organizations

Greater awareness of reputational risk

Increased regulatory emphasis on non-financial measures

Increasing employee influence

Accelerating innovation (in new products and services)

Increasing global competition

Growing power of worldwide media

Security threats (e.g., terrorism, pandemics)


Increasing customer influence

Speed and geographic spread of informationdissemination via the Internet

32.47%

48.70%

25.97%

16.23%

16.88%

39.61%

11.69%

29.22%

37.66%

10.39%

9.09%

5.19%

Select the top three drivers.

23


9. Which of the following areas of corporate performance are the key drivers of success for your organization?

64.57%

Select the top three drivers.

0% 10% 20% 30% 40% 50% 60%

Employee commitment



Financial results




Brand strength

Ability to withstand terrorist attacksand other post 9/11 threats




21.14%

23.43%

52%

37.71%

30.86%

28%

15.43%

5.71%

12.57%

1.14%

1.71%

10. Which areas of corporate performance do you believe your company’s senior management should monitor, and which should the board monitor?


Senior managementshould monitor

Board should monitor

Both should monitor

Financial results


Employee commitment




Innovation(i.e., success in developing new products/services)



Brand strength

14.45%

12.28%

5.78%

40.35%

79.77%

47.37%

61.40%

52.02%

8.19%

9.83%

30.41%

38.15%

51.15% 14.37% 34.48%

61.85% 12.72% 25.43%

38.60% 17.54% 43.86%

43.35% 21.97% 34.68%

15.79% 30.41% 53.80%

28.32% 11.56% 60.12%

31.76% 17.65% 50.59%

24


11. Which areas of corporate performance do you believe your company’s senior management should take primary responsibility for, and which should the board take primary responsibility for?


Senior management should take responsibility

Board should take responsibility

Both should take responsibility

Financial results


Employee commitment







Brand strength

48.85%

21.97%

11.49%

49.13%

39.66%

28.90%

70.76%

68.21%

14.04%

13.29%

15.20%

18.50%

68.97% 10.92% 20.11%

71.10% 13.29% 15.61%

51.16% 18.60% 30.23%

49.43% 21.26% 29.31%

21.84% 38.51% 39.66%

48.24% 17.06% 34.71%

39.77% 20.47% 39.77%

0% 10% 20% 30% 40% 50% 60% 70%

Employee commitment



Financial results




Brand strength





12. In your role, to which of the following areas do you give the greatest attention?

70.29%

36.57%

25.14%

34.29%

44%

28%

19.43%

15.43%

7.43%

9.14%

1.71%

0.57%

Select the top three areas.

25


0% 10% 20% 30% 40% 50% 60%

Skepticism that these measures aredirectly related to the bottom line

Undeveloped tools for analyzing such measures

Lack of familiarity with these measures on part of management

Lack of familiarity with these measureson part of board members

Concern over risk that competitors will gain valuable intelligence

Lack of time among board members and senior managementto focus on a new set of metrics

None of the above; there are no significant barriers


Low levels of accountability for these aspects of performance

Lack of information on competitors’ performance in these areas

13. What do you think are the main barriers to the effective usage of non-financial performance measures by your organization?

40.57%

41.14%

48%

55.43%

20.57%

44%

5.71%

18.86%

5.14%

1.14%

Select the top three barriers.

14. How would you rate the quality of information that your board gets in each of the following areas of corporate performance?


Excellent Average Poor Don’t know

Financial results


Employee commitment







Brand strength

67.82%

27.75%

28.16%

50.87%

2.30%

16.76%

1.72%

4.62%

12.14%

23.12%

49.71%

46.82%

29.48%

22.54%

8.67%

7.51%

29.89% 49.43% 16.09% 4.60%

25.86% 54.60% 10.92% 8.62%

19.19% 48.26% 23.26% 9.30%

17.92% 52.60% 21.97% 7.51%

17.24% 44.25% 30.46% 8.05%

26.44% 50.00% 16.67% 6.90%

16.18% 35.84% 21.97% 26.01%

26


0% 10% 20% 30% 40% 50% 60%

Employee commitment



Financial results




Brand strength

Ability to withstand terrorist attacks and other post 9/11 threats


Don’t know

None of the above; the quality of information is good in all areas



15. Are there any areas in which you feel your company’s senior management needs better quality information than it now receives?

20%

35.43%

57.71%

48%

30.86%

26.29%

36%

30.86%

32%

29.71%

0.57%

0.57%

16%

4.57%

Select all areas where better information is needed.

0% 20% 40% 60% 80% 100%

Average

Fair

Good

Excellent

Don’t know

Poor

42.69%4.65%

43.86%24.42%

12.28%36.63%

1.17%20.93%

0%13.37%

0%0%

Financial performance Non-financial performance

16. How would you rate your organization’s record of measuring and monitoring financial and non-financial aspects of performance?

27


0% 10% 20% 30% 40% 50% 60%

The current health of partners of the organization(allies, suppliers, etc.)

The future prospects of partners of the organization(allies, suppliers, etc.)

The company’s future prospects

The company’s current health

None of the above; the metrics are effective in all areas

Don’t know


The company’s performance in non-financialareas relative to its competitors

The company’s financial performancerelative to its competitors

17. Do you feel your company’s financial and non-financial performance metrics are not effective in providing an accurate and reliable indication to your board and senior management in any of the following areas?

21.14%

52.57%

40.57%

56%

26.86%

58.29%

6.29%

0.57%

0%

Select all areas where performance metrics are not effective.

Short-term decision-making(decisions over the next 12 months)

Mid- to long-term decision-making(decisions beyond 12 months out)



Don’t know


None of the above; financial performancemetrics are effective in all areas

Achievement of appropriate valuation in the capital markets

18. Are there any business objectives you feel your company’s financial performance metrics do not effectively support the board and senior management in accomplishing?

43.68%

32.76%

16.09%

50%

27.01%

14.37%

2.30%

0%

Select all objectives for which financial performance metrics are not effective.

0% 10% 20% 30% 40% 50%

0% 10% 20% 30% 40% 50% 60%

Short-term decision-making(decisions over the next 12 months)

Mid- to long-term decision-making(decisions beyond 12 months out)



Don’t know


None of the above; financial performancemetrics are effective in all areas

Achievement of appropriate valuation in the capital markets

19. Are there any business objectives you feel your company’s non-financial performance metrics do not effectively support the board and senior management in accomplishing?

47.13%

39.66%

29.31%

51.15%

22.99%

8.62%

4.60%

0%

Select all objectives for which non-financial performance metrics are not effective.

28


20. In which of the following areas of performance does your board hold management accountable by rewarding them for good performance?

Select all areas for which management is rewarded.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Employee commitment


Quality of governance andmanagement processes

Financial results




Brand strength



Operational performance (efficiency andeffectiveness of key business processes)

84.39%

26.01%

24.86%

35.84%

47.40%

32.37%

23.70%

10.98%

8.67%

10.98%

1.73%

21. In which of the following areas of governance and management processes does your board or senior management use identifiable performance metrics to run the company?


0% 10% 20% 30% 40% 50%

Performance of individual board members

Quality of strategic decision-making

Overall quality of board performance

Quality of governance structure (i.e., board composition, roles and responsibilities, etc.)

Quality of risk management and internal controls

None of the above; we do not measuregovernance and management processes

Don’t know


Information technology and other technologies

Operational efficiency

28.90%

27.17%

25.43%

49.71%

27.75%

30.06%

34.68%

13.29%

8.09%

0%

29


22. In which of the following areas of employee commitment does your board or senior management use identifiable performance metrics to run the company?


0% 10% 20% 30% 40% 50%

Competitiveness of compensation and benefits

Quality of development and learning programs

Retention levels

Success of recruitment practices

Fairness of employment terms and conditions

Quality of health and safety provisions

Levels of employee commitment

None of the above; we do notmeasure employee commitment

Don’t know


Levels of diversity

Quality of internal communications

29.48%

50.29%

43.93%

21.39%

23.12%

24.28%

26.01%

23.70%

28.90%

2.31%

0%

13.87%

23. In which of the following areas of customer satisfaction does your board or senior management use identifiable performance metrics to run the company?


0% 10% 20% 30% 40% 50% 60%

Satisfaction with pricing levels

Quality of service delivery

Satisfaction with product quality

Satisfaction with new products/services

None of the above; we do notmeasure customer satisfaction

Don’t know


Customer loyalty

Economic value of customer to the company

37.93%

57.47%

40.80%

23.56%

37.36%

56.90%

13.22%

3.45%

0%

30


24. Which triggers are most likely to spur your organization to reassess how it measures and monitors performance?

Select up to three triggers.

0% 10% 20% 30% 40% 50% 60%

Board members or the CEO demands greatervisibility and accountability

Sharp decline in customer satisfaction/retention

Competition for capital dictates expandedreporting and more stringent control

Greater understanding of how to measurenon-financial drivers of performance

Introduction of a breakthrough product/service by a competitor

Significant increase in customer power


Significant increase in competition

Major compliance failure

Significant security threat (such as terrorist attack)

Public relations crisis

Sharp decline in employee satisfaction/retention

53.71%

21.71%

43.43%

16.0%

21.14%

44.57%

14.29%

9.14%

17.14%

21.14%

2.86%

0.57%

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respectivesubsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted toexcellence in providing professional services and advice, focused on client service through a global strategy executed locallyin nearly 140 countries. With access to the deep intellectual capital of approximately 135,000 people worldwide, Deloittedelivers services in four professional areas—audit, tax, consulting, and financial advisory services—and serves more than 80percent of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients,and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein,and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for eachother’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names“Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names.

© 2007 Deloitte Touche Tohmatsu. All rights reserved.

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