Customer satisfaction. Innovation. Talent. Operational efficiency… These and other nonfinancial drivers of long-term growth—while sometimes difficult to measure—are moving higher on audit committee and/or board agendas as directors sharpen their focus on the company's long-term performance. Indeed, while the short-term can't be ignored, boards are increasingly recognizing that an all-consuming focus on quarterly earnings and “total shareholder return” can undermine a company’s long-term performance.
“We're focusing on a longer time horizon – three, five, even 10 years out,” noted one of the 1,400 directors and executives who attended KPMG's Spring 2013 Audit Committee Roundtable Series. “Our board is spending more time talking about leading indicators that reflect the long-term health of the company, versus the rear-view mirror information. It's definitely a more challenging discussion, but that's what the board is there for – to ensure the company's long-term success.”
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Many boards today are sharpening their focus on the company's drivers of long-term value creation. Clearly, financial health is vital: cash flow, growth in revenues and profits, and return on invested capital are key; but, as one panelist noted, “these are historical measurements that don't necessarily tell us about future performance and the potential for future growth and returns.” As a result, more companies and directors are putting greater emphasis on key nonfinancial measures or drivers of the long-term health and performance of their organizations.
Of the various nonfinancial metrics discussed at the roundtables, attendees identified three factors they view as being critical to the successful execution of the company’s strategy: customer satisfaction, operational efficiency and talent management. At the same time, nearly one in three attendees said the company has not identified metrics to measure the company's performance and execution in those areas. Further, more than half said the company has not identified leading indicators (versus lagging indicators) to show whether the strategy is being implemented as planned.
Every company needs to translate the drivers of long-term value into more tangible or specific drivers of value based on its particular strategy and risk profile, strengths and weaknesses, and a broad range of external factors shaping the business and risk environment. Such external factors can include emerging technologies and social media, globalization, availability of natural resources, the strength of global competitors and the importance of key stakeholders—all of which have a direct impact on the company's strategy and business model and its long-term value drivers.
A number of questions and considerations can help audit committees and boards sharpen the company's focus on its key long-term metrics, including:
Do we understand the key drivers of long-term value for the enterprise?
What are the important metrics to measure performance? How many metrics should the board focus on?
Are we too focused on lagging indicators – i.e., “rear-view mirror” indicators measuring financial and operational performance?
What are the important leading indicators that tell us whether the strategy is being implemented as planned?
Have we found the right balance between leading and lagging indicators?
How do we communicate the company’s drivers of long-term value—and related metrics—to investors?
Finally, as one roundtable panelist suggested, “the board's role is to help alleviate the pressure on management for short-term results—by setting the right tone, focusing on the durability of the business model and ensuring that the company is communicating its long-term focus to investors.”