Managers and boards are often pushed by investors, fund managers and analysts to focus on a single measure of success, such as shareholder value or profit, and then they do everything they can to maximize it. As a result, they tend to overlook other important measures—for instance, customer satisfaction, employee motivation and supplier support—and their narrow view of the organization can do long-term damage.
Companies should be managed much more holistically. Certainly, some enlightened CEOs and boards understand this. When Paul Polman became the CEO of Unilever, for example, he stopped giving analysts earnings guidance, dispensed with quarterly profit reports and said there’d be no special treatment for hedge funds. Instead, he focused his metrics on the long-term needs of a full range of stakeholders. Initially, the market took a dim view of this shift, punishing the stock price. But it rebounded months later, after analysts accepted Polman’s wider lens.
Think of it this way: Organizations are a lot like individuals. To live a full, satisfying life, you probably wouldn’t focus exclusively on wealth, sacrificing every bit of joy so you can have a large bank balance on your deathbed. Nor, most likely, would you concentrate only on your health, wrapping yourself in cotton wool to take zero risks with your well-being. Maximizing one thing would mean giving up too much in other areas. Most of us have found that it’s better to work on a combination of things—to look after the whole self’s best interests.
Similarly, business leaders and governance teams must look after the whole company. Their mandate is to improve the probability of their organizations’ long-term survival and growth. To gauge their success, they need a composite scorecard with both objective and subjective targets for key stakeholders. For instance, they may want to gauge employees’ productivity, innovation and contentment, and customers’ profitable revenue and satisfaction. And so it goes, stakeholder by stakeholder.
But even if a metric is classed as objective, someone ultimately has to apply the “good enough” test, which is subjective. This requires continual judgment and adjustment—it’s much messier than using a single metric—but it’s what executives and boards get paid for.
Graham Kenny is the managing director of Strategic Factors, a consultancy based in Sydney, Australia. He is the author of Crack Strategy’s Code and Strategic Performance Measurement.