Alternative measures of company performance
Does a narrow focus on financial performance measures damage the long-term prospects of British businesses and the wider society in which they are situated?
This Autumn, the High Pay Centre is undertaking a new workstream, supported by the Polden Puckham Charitable Foundation, looking at alternative measures of business performance.
Millions of people across the UK work for private companies, while delivering private sector growth is perhaps the key objective for any Government. But despite this, it is rare that serious consideration is given to the true value to society of all these working hours and policy exertions.
Historically, British businesses have been judged solely by financial metrics – profit margins, earnings per share, return to shareholders. Today, Corporate Social Responsibility initiatives have taken on a higher profile and many major companies have adopted ‘triple bottom line’ reporting mechanisms, documenting their annual social and environmental impact as well as their profit and loss account. However, it is still very rare to find the business pages of a newspaper discussing matters other than those likely to affect a company’s financial performance, usually in the short-term.
Equally, the performance-related element of most executives’ pay packages – which can be worth many times their basic salary – is generally tied to financial metrics like earnings per share or performance relative to competitors. Given that these incentives contribute to a total package worth £4.8 million to the average FTSE 100 executive, our captains of industry have a personal interest in delivering increased profits in the short-term, regardless of the wider consequences.
The failure to properly measure or prioritise the effect these companies have on society beyond the profit they generate seems strange in light of the well-documented socio-economic and environmental problems that some have attributed in part to particular business sectors, for example, snack food or fast food chains and the obesity epidemic; carbon emissions and the fossil fuels industry; or the issues around inequality arising from excessive executive pay.
The High Pay Centre’s research will focus on how these broader impacts can be measured and the challenges posed by the process. We will seek to identify ways in which criteria such as research, innovation and investment in staff development can become more central to the assessment of company performance, and how business leaders’ remuneration can be linked to these objectives, rather than narrow financial targets. Ultimately we hope our work will provide a long-term economic case – both for businesses and the UK as a whole – for a more holistic outlook on what companies hope to achieve.
We are really keen to hear from anyone with an interest in this area, in terms of anything from suggested reading materials to interesting policy ideas for encouraging alternative measurements of company performance. If you would like to contribute to the project please do get in touch with Luke Hildyard via luke.hildyard@highpaycentre.org