The madness of metrics: Performance reporting to the board



By Prasanthi Vasanthakumar, ICD

How meaningful are the metrics your board receives? The quality and breadth of performance reporting to the board is critical to an organization’s success. Directors need information that enables them to probe and question, examine critical success areas and key performance indicators (KPIs), and identify actions management can take when performance doesn’t match projections. And it’s up to directors to make sure they get comprehensive information to make sound decisions, rather than passively accept what they are given.

“As a board member, it can be really hard to make sense of the information you’re getting, and as a member of management, it can be difficult to decide how much information to give your board,” says Amee Sandhu, Founder and Principal Lawyer of Lex Integra Professional Corporation and Director at Family Day Care Services. “When management gives too much information, the board can’t see the forest for the trees. On the other hand, if boards receive too little, they cannot make a meaningful contribution because they may be missing part of the picture. Boards need information in a broader context, so that they can see the big picture to effectively fulfil their governance mandate.”

What good information looks like
To do their jobs well, boards need enough – but not too much – information to facilitate decision-making and inspire the right questions. Good-quality information must be relevant, integrated, timely, in perspective, reliable, comparable and clear.1

Eric Gould, Partner at Modus Strategic Solutions, Inc., notes that a critical test of prudence must be applied. “Prudence doesn't mean you have to have a crystal ball, but it does mean that every decision you make needs to be well-founded,” he says. “Decisions shouldn’t be judged by their ultimate outcome. But these decisions must be defensible. All information going to the board should be vetted through these questions: Is it accurate? Is it timely? If there is a decision required, are options defined with appropriate rigour? Are the risks defined properly? Metrics must be built with these requirements in mind.”

When the numbers don’t add up
Many boards rely on financial metrics to assess the health of a business, but these can be tricky. Unlike strategy, which is more abstract, numbers are concrete and easy to grasp. For this reason, it’s mentally easy to replace strategy with metrics – a phenomenon known as surrogation.



Surrogation did a real number on Wells Fargo, for example. The company’s strategy of building long-term customer relationships was measured, in part, by the amount of cross-selling achieved. Fuelled by an environment of financial incentives, pressure to meet quotas and a permissive culture, the focus on cross-selling led to employees opening 3.5 million deposit and credit card accounts without customer consent. In a perfect example of numbers hijacking strategy, an obsession with measurement ended up destroying many of the bank’s long-term relationships.

Wells Fargo exemplifies the value of using a prudence test, says Gould. It appears the information lacked appropriate rigour, didn’t present suitable options and failed to identify risks.

Making financial metrics work
That’s not to say financial metrics are bad. Numbers help us understand our business environment, results and direction. These practices can help metrics work to an organization’s advantage:

Involve the right people
The people responsible for executing strategy should have a hand in developing it. When people design objectives, they understand them better and are more likely to choose the right course of action – and less likely to be swayed by metrics.

Avoid tying compensation solely to metrics
When linked to financial incentives, metrics become more powerful by stimulating monetary motivations. To reduce surrogation, it’s better to set targets that align closely with the organization’s strategy and values.

Use more than one metric
Ironically, the more metrics you use, the less likely people are to fall prey to surrogation. Multiple metrics can complicate performance evaluation, but they keep people focused on the strategy.2 They also enable comparison, which can be useful in determining the timeliness and accuracy of information provided.

Ensure the metrics track meaningful data
KPIs should be indicators that track trends and velocity over time, thus performance, says Gould. For example, KPIs that reflect whether goals are on track and resources are appropriate, and what expected overhead will cost over time, are valuable. Isolated occurrences that cannot establish a trend are poor KPIs, and can lead to incorrect conclusions on velocity.

“Ultimately, all metrics must pass the ‘eye test’,” says Gould. “Do the numbers portray what I can see with my own eyes, and if not, why?”

Risky business: Ignoring non-financial metrics
Even if you get financial metrics down pat, they are only one measure of the health of an organization, cautions Sandhu. “If a board is only looking at financial measures, it’s sending a message that it doesn’t really stand behind the stated company values,” she says. “It’s signalling that everything a company says it cares about – from what’s in its Code of Conduct to its tweets – doesn’t really matter.”
According to Sandhu, risk should be a key consideration for boards. “If you identify and protect yourself from risk, you will save money and, of increasing importance, diminish the chance of reputational harm,” she says.

But there’s a catch. Risk is not as easy to measure as financial performance – but it’s not impossible. For example, if a company prioritizes integrity, compliance with laws, and corporate culture, the board should determine metrics to gauge the threat posed by risks such as bribery, sexual harassment, data privacy breaches, and health and safety violations.

Asking the right questions
Culture-specific metrics include turnover rates, types and numbers of grievance and employee helpline reports, absenteeism and customer feedback. “One of the values I’m seeing in terms of having a culture dashboard developed is the brainstorming around measures,” says Robert McFarlane, Director at Entertainment One Ltd., in the ICD’s The Culture Imperative. “If you pull all the metrics, you can create one integrated view and then you start to see some themes developing.”3

To paint a fulsome picture with the right metrics, Sandhu says the board may consider asking the following questions: Does the company have an ethics and compliance program in place? How many internal complaints have been made, and what percentage of those allegations have led to proof of wrongdoing? Is there a pattern in the types and/or location of complaints – for example, are 80 per cent of complaints about sexual harassment coming from one part of the organization? Are there statistics on how the salaries of whistleblowers compare to company averages?



Training on key risk factors could be another component of measurement. Does the company have appropriate training in place? How many employees have completed the training? More importantly, has senior management completed the training?

These are examples of questions boards can ask to get a numerically-based picture of the risks facing an organization. “The earlier you can spot the risk, the more meaningful the dialogue between management and the board,” says Sandhu.

The bottom line
It can be tempting to fixate on financial performance because it’s easy to quantify and appears to point directly to an organization’s success. However, the board can guide management to provide non-financial performance metrics to get the whole story.

“There’s no cut-and-paste guideline for metrics,” says Sandhu. “What’s important to your organization will be different from another. However, I would strongly advise all companies to find some kind of meaningful metric to measure ethical conduct, as well as other risks.”

To illustrate her point, she goes back to the case of Wells Fargo: “When you focus only on financial metrics, you miss out on seeing cultural risks, which creates a dangerous blind spot.”

Sources
1 CIMA.  Performance reporting to boards: a guide to good practice (2003)
2 Harvard Business Review. Don’t let metrics undermine your business (2019)
3 Institute of Corporate Directors. The Culture Imperative (2019)

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