My Contributions

Non-financial performance measurement

The limitations of financial measures were identified most clearly by Johnson and Kaplan (1987), who argued that there was an excessive focus on short-term financial performance. They commented:

Managers discovered that profits could be ‘earned’ not just by selling more or producing for less, but also by engaging in a variety of non-productive activities: exploiting accounting conventions, engaging in financial entrepreneurship, and reducing discretionary expenditures (p. 197).

Examples of exploiting accounting conventions have been seen in corporate collapses such as Enron and WorldCom, while financial entrepreneurship can be seen as one of the causes of the Global Financial Crisis. The discretionary costs that could be ‘eliminated’ in pursuit of short-term profit include:

R&D, promotion, distribution, quality improvement, applications engineering, human resources, and customer relations – all of which, of course, are vital to a company’s long-term performance. The immediate effect of such reductions is to boost reported profitability, but at the expense of sacrificing the company’s long-term competitive position (p. 201).

Johnson and Kaplan (1987) emphasized the importance of non-financial indicators, arguing:

Short-term financial measures will have to be replaced by a variety of non-financial indicators that provide better targets and predictors for the firm’s long-term profitability goals (p. 259).

There have many attempts at non-financial performance measurement. Eccles (1991) argued that ‘income-based financial figures are better at measuring the consequences of yesterday’s decisions than they are at indicating tomorrow’s performance’. Meyer (1994) proposed a ‘dashboard’, arguing that traditional performance measurement systems don’t work as they track what happens within not across functions. Innes (1996) described the tableaux de bord that had been developed by ‘sub-departments’ in French factories....