A Stakeholder Approach to Strategic Performance Measurement

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Management practices have undergone many innovations. Companies have been down-sized, delayered, and hollowed out. Newly trained and empowered employees have implemented many innovative practices including continuous improvement, reengineering, just-in-time manufacturing, and total quality management. Outsourcing and exclusive supply relationships now allow organizations to focus on core activities.

Many of these innovations have fundamentally changed the relationships between the organization and its employees, customers, suppliers, and other stakeholders. In many instances, arm’s-length transactions between independent parties have been replaced by long-term partnerships in which intangibles such as service, innovation, and flexibility are essential to success. Intangible, difficult-to-measure resources are driving the creation of wealth in many companies. Consequently, traditional accounting-based performance measures that rely on transaction prices are not as useful.

Most companies use formal performance measurement systems that are extensions of their financial reporting systems. They justify this practice because the financial reporting system provides measures that:

  • Are generally regarded as reliable and consistent, thereby giving a solid foundation for developing reward and accountability structures.
  • Mesh with the primary objective of creating profits for owners, thereby giving a performance measurement focus consistent with organizational objectives.

However, criticisms of conventional performance measurement systems have been increasing. Critics charge that financial performance measures lack the requisite variety to give decision makers the range of information they need to manage processes. For example, one study concluded: “There’s a growing concern . . . that financial measures are inadequate tools for strategic decision making.”1 Another study found that inadequately designed and operated performance measurement systems have contributed to corporate decline in the United States.2

The conclusion is that performance measurement systems based primarily on financial performance measures lack the focus and robustness needed for internal management and control. Financial performance measures are derived from accounting systems that generate and communicate financial information to support the contractual relationships and the capital markets that result from separating owners and managers in the modern corporation. These accounting systems were designed with the priority of consistency and hardness — attributes needed to instantly compare firms and evaluate a firm’s behavior over time. These systems were not designed to communicate decision-relevant information to people inside the organization. Some complaints with conventional financial information are that it ignores important issues like customer satisfaction, cannot predict because it is based on historical cost, and provides little or no basis to judge the effectiveness of processes like personnel relations systems.



1. C.K. Brancato, New Corporate Performance Measures (New York: Conference Board, 1995).

2.C.Y. Baldwin and K.B. Clark, “Capabilities and Capital Investments, New Perspectives on Capital Budgeting,” Journal of Applied Corporate Finance, volume 5, Summer 1992, pp. 67–82.

3. Based on our observations in the organizations we visited during this study and based on other observations of practice, we believe that most people find it unnatural to think of their jobs in financial terms. For example, production supervisors seem to think in terms of quality, throughput, waste, and meeting schedules, not in terms of an accountant’s financial rendering of the production process. This does not mean that operations people are oblivious to financial considerations. Rather, operations personnel tend to focus on the causes of financial results rather than the financial results themselves. Therefore, operations personnel often find it unnatural to manage in terms of financial results rather than the physical process measures, which they feel are the causes of the financial results.

4. See, for example:

C. Pollitt, “Management Techniques for the Public Sector” (Ottawa, Ontario: Canadian Centre for Management Development, Research Paper No. 17, July 1995); and

P. Warrian, “The End of the Public Sector ‘Industrial’ Relations in Canada?” (Toronto, Ontario: KPMG Centre for Government Foundation, October 1995).

5. The tableau de bord is a performance measurement concept that has been the focus of attention in Europe, particularly France, for at least forty years. The primary message of the tableau de bord is that managers need a set of relevant indicators to monitor the process or system for which they are responsible. See:

M. Lebas, “Tableau de Bord and Performance Measurement” (London: London School of Economics, Management Accounting Research Group Conference, paper, 22 April 1993).

6. R.S. Kaplan and D.P. Norton, The Balanced Scorecard (Boston: Harvard Business School Press, 1996).

7. The issues relating to employees, suppliers, and the community are implied in Kaplan and Norton’s (1996) balanced scorecard — for example, these matters would be included in the activities that they refer to as learning and growth. However, we feel that the Kaplan and Norton view fails to recognize that stakeholder issues, including what stakeholders want from and offer to the organization, are issues that must be considered simultaneously, as they are in conventional SWOT analysis, rather than sequentially as the Kaplan and Norton model implies.

8. There has been relatively little formal research published about the role of performance measures, other than financial measures, in practice. One conclusion that Ittner et al. reach is that “the relative weight placed on nonfinancial measures is greater in firms following an innovation-oriented ‘prospector’ strategy than in firms following a cost leader or ‘defender’ strategy.” This implies that, at least to some extent in practice, the choice of performance measures does reflect the organization’s competitive strategy. The authors conclude that an organization’s choice of performance measures reflects important choices made about its governance structure that, in turn, reflects how the organization mediates the relationships among its stakeholders — a strategic choice that we discuss as critical in the choice of organization performance measures. See:

C.D. Ittner, D.F. Larcker, and M.V. Rajan, “The Choice of Performance Measures in Annual Bonus Contracts” (Philadelphia, Pennsylvania: University of Pennsylvania, Wharton School, unpublished working paper, May 1995).

9. To provide a preliminary test and to refine our initial notions about the nature and role of strategic performance measurement, we visited twelve organizations that had outstanding reputations for their abilities to deal with one of the five stakeholder groups: customers, employees, suppliers, shareholders, and the community. Our purpose was to determine whether and how each organization used performance measurement to support its performance level. We visited the Four Seasons Hotel and Resorts, Xerox Canada, Nisson Canada, FedEx, Loblaws, General Motors, Imperial Oil Limited, American Barrick Resources Corporation, Ben & Jerry’s Homemade, Body Shop Canada, NCR, and TransCanada PipeLines Limited.

10. See: J. Moore, “The Death of Competition,” Fortune, 15 April 1996, p. 142.

11. For an interesting discussion of stakeholder capitalism and shareholder capitalism, see:

“Unhappy Families,” The Economist, 10 February 1996, pp. 23–25.

12. Our perspective here is on what the community’s role is, rather than what it should be. Most of the organizations in our study clearly understood the role and nature of the community in affecting its ability to contract with its other stakeholders. The causal relationship between social responsibility and financial returns remains unclear. However, the point here is that organizations in the studies quoted here seem to balance the needs and requirements of the community when pursing financial objectives. See:

M.L. Pava and J. Krausz, “The Association between Corporate Social Responsibility and Financial Performance: The Paradox of Social Cost,” Journal of Business Ethics, volume 15, March 1996, pp. 321–357.

13. We define increasing shareholder wealth as providing a return to shareholders that exceeds the return that they require for the risks they face by investing in that organization. The strategic performance measurement model we develop here can be applied to profit-seeking organizations that have multiple primary objectives — for example, objectives that are owner-related and those that are community- or employee-related. Moreover, this model can be applied to both profit-seeking and not-for-profit organizations by redefining the definition of the organization’s primary objectives.

14. Realistically, this process may be sequential and evolve over time. The key is that each stakeholder group must believe that, when the process is complete, there will be an acceptable balance between what they give to and receive from the organization.

15. The annual Fortune survey and list of America’s most admired companies provides a good example of an interest in corporate reputation (a community measure) being a secondary objective related to a primary objective of shareholder wealth. See:

A.B. Fisher, “Corporate Reputations,” Fortune, 6 March 1996, pp. 90–98. For a summary of the literature examining the relationship between financial performance and social responsibility, see:

Pava and Krausz (1996).

16. Managing by focusing on the actual shareholder wealth created, for example, profits, is comparable to a coach who is trying to improve the performance of his team and limits himself to studying the final score of the team’s games or to a race car driver who confines her attention solely to road speed during a race.

17. For a discussion of the importance and emerging role of trust in organizations, see:

“Trust in Me,” The Economist, 16 December 1995, p. 61; and

F. Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (New York: Free Press, 1995), p. 11.

18. This is the basis and purpose for customer, product, and product line profitability evaluations.

19. Based on the field experiences of Ernst & Young, one study developed seven warning signs suggesting failures of an existing performance measurement system. See:

M.R. Vitale and S.C. Mavrinac, “How Effective Is Your Performance Measurement System?,” Management Accounting (USA), volume 77, August 1995, pp. 43–47.

20. One facet of employee satisfaction is employee loyalty, which some people believe creates improved organization performance and wealth. See, for example:

F.F. Reichheld, The Loyalty Effect (Boston: Harvard Business School Press, 1996).

21. For example, how does quality improvement translate into increased sales and profits? Or, how does an employee incentive pay system translate into improved employee motivation and performance that, in turn, result in increased organization profitability?

22. These three roles of performance measurement have been understood, if not implemented in practice, for a long time. For example, based on a controllership study undertaken by Herbert Simon and his coauthors, Charles T. Horngren proposed three roles for performance measurement — scorecard-keeping, attention directing, and problem solving — that are loosely related to the three roles that we propose here. See:

H.A. Simon, H. Guetzkow, G. Kozmetsky, and G. Tyndall, Centralization vs. Decentralization in Organizing the Controller’s Department (New York: New York Controllership Foundation, 1954); and

C.T. Horngren, G. Foster, and S.M. Datar, Cost Accounting: A Managerial Emphasis (Upper Saddle River, New Jersey: Prentice Hall, 1997).

23. P. Pfeiffer, Gannetteer, March–April 1995, p. 10.

24. P.F. Drucker, “The New Society of Organizations,” Harvard Business Review, volume 70, September–October 1992, pp. 95–104.

25. Virtually every organization that commented on a Kaplan and Norton balanced scorecard article had installed a strategic performance measurement system. Each organization indicated that a major benefit of strategic performance measurement is to align or coordinate the activities of different organization groups and decision makers and to focus attention on the organization goals reflected in or communicated by the strategic performance measurement system. See:

Kaplan and Norton (1996).

26. For example, a salesperson cannot be held accountable for the quality of the manufactured product, only the quality of the service offered to the customer.

27. See: T. Peters, “Legacies with Value Added,” The Independent, 5 February 1995, p. 10.

28. An example of an organization that has developed relationships between process measures and financial results, Weirton Steel, a U.S. steel products manufacturer, estimates that each percentage point increase in its raw material yield (the ratio of the weight of finished product to the weight of the raw steel entered into the finishing process) is equivalent to a $4.7 million decrease in operating costs. This provides an important means of relating process improvement results, which are secondary measures of performance, to profitability results, which are primary measures of performance.

29. These criteria are remarkably similar to the criteria for good performance measurement practice that were developed independently in other studies. See:

Next Steps Team, “The Strategic Management of Agencies: Models for Management” (London, United Kingdom: Office of Public Service, September 1995); and

National Audit Office of the British Government, “Performance Measurement and Value for Money Audit” (London, United Kingdom: Government of the U.K., 1995).


The authors gratefully acknowledge the financial support for this project provided by the Society of Management Accountants of Ontario.

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