PERFORMANCE EVALUATION AND PERFORMANCE

REPORTING
Introduction

■ For all organisations the question of the management of the

organisation depends upon the ability to measure performance and
then evaluate and report upon that performance. When we are
considering CSR this is equally true, although it becomes more
difficult to measure and evaluate that performance. In this chapter
therefore we will consider some of the issues involved.
What is performance?

■ Is the ability of an organization to reach its vision,mission and goals

and optimize results.

■ It should be clear that the determination of good performance is

dependent upon the perspective from which that performance is
being considered and that what one stakeholder grouping might
consider to be good performance may very well be considered by
another grouping to be poor performance. The evaluation of
performance therefore for a business depends not just upon the
identification of adequate means of measuring that performance but
also upon the determination of what good performance actually
consists of.
■ Just as the determination of standards of performance depends upon the perspective from which it is being
evaluated, so too does the measurement of that performance, which needs suitably relevant measures to
evaluate performance, not absolutely as this has no meaning, but within the context in which it is being
evaluated. From an external perspective therefore a very different evaluation of performance might arise,
but moreover a very different measurement of performance, implying a very different use of accounting in
that measurement process, might arise.

■ The measurement of stakeholder performance is perhaps even more problematic than the measurement of
financial performance. Objective measures of stakeholder performance are not reported in the annual
reports of companies and therefore we have chosen to consider the subjective measures included within the
“Britain’s Most Admired Companies” surveys annually published in Management Today. These measures
provide a reputation rating, as gathered from ‘rivals’ perceptions, in nine categories and these measures are
also added to also provide a total score. The nine categories are:
■ • Quality of management;
■ • Quality of goods and services;
■ • Capacity to innovate;
• Quality of marketing;
• Ability to retain top talent;
• Community and environmental responsibility;
• Financial soundness;
• Value as long-term investment;
• Use of corporate assets.
Social accounting

■ Social accounting first came to prominence during the 1970’s when the
performance of businesses in a wider arena than the stock market, and its
value to shareholders, tended to become of increasing concern. This concern
was first expressed through a concern with social accounting. This can be
considered to be an approach to reporting a firm’s activities which stresses
the need for identification of socially relevant behaviour, the determination of
those to whom the company is accountable for its social performance and the
development of appropriate measures and reporting techniques.

■ Thus social accounting considers a wide range of aspects of corporate

performance and encompasses a recognition that different aspects of
performance are of interest to different stakeholder groupings. These aspects
can include:
•The concerns of investors
•A focus upon community relations
•A concern with ecology

■ Measuring performance in terms of these aspects will include, in addition to the

traditional profit based measures, such thing as:

•Consumer surplus
•Economic rent
•Environmental impact
•Non-monetary values.
■ Many writers consider, by implication, that measuring social
performance is important without giving reasons for believing so.
Solomons (1974) however considered the reasons for measuring
objectively the social performance of a business. He suggests that
while one reason is to aid rational decision making, another reason is
of a defensive nature.

■ Unlike other writers, Solomons not only argued for the need to
account for the activities of an organisation in term of its social
performance but also suggests a model for doing this, in terms of a
statement of social income. His model for the analysis of social
performance is as follows:
■ While Solomons proposes this model, which seems to provide a reasonable
method of reporting upon the effects of the activities of an organisation on its
external environment, he fails to provide any suggestions as to the actual
measurement of external costs and benefits. Such measurement is much more
problematic and this is one of the main problems of any form of social
accounting the fact that the measurement of effects external to the
organisation is extremely difficult.

■ Indeed it can be argued that this difficulty in measurement is one reason why
organisations have concentrated upon the measurement through accounting
for their internal activities, which are much more susceptible to measurement.
Aspects of performance

■ One factor of importance to all organisations, which comes from its

control system, is the factor of performance measurement and
evaluation. To evaluate performance it is necessary to measure
performance and evaluation. Churchman (1967) states that
measurement needs the following components:

• Language to express results;

• Specification of objects to which the results will apply;
• Standardisation for transferability between organisations or over time;
• Accuracy and control to permit evaluation.
■ Kimberley, Norling and Weiss (1983) also make this point and argue that
traditional measures do not necessarily even measure some aspects of
performance and can certainly lead to inadequate and misleading evaluations of
performance. They state that, Traditional perspectives on performance tend to
ignore the fact that organisations also perform in other, less observable arenas.
Their performance in these arenas may in some cases be more powerful shapers
of future possibilities than how they measure up on traditional criteria. And,
paradoxically competence in the less observable arenas may be interpreted as
incompetence by those whose judgements are based solely on traditional
criteria. Particularly in the case of organisations serving the interests of more
than one group where power is not highly skewed and orientations diverge, the
ability to develop and maintain a variety of relationships in the context of
diverse and perhaps contradictory pressure is critical yet not necessarily visible
to the external observer.
The balance scorecard

■ A different perspective upon performance evaluation has been proposed by

Kaplan and Norton (1992) with the development of their balanced scorecard
approach. They argue that traditional measurement systems in organisation
are based upon the finance function and so have a control bias but that the
balanced scorecard puts strategy and vision at the centre. They identify four
components of the balanced scorecard, each of equal importance, and each
having associated goals and measures. The four components are:
■ • Financial perspective – how does the firm look to shareholders;
• Customer perspective – how do customers perceive the firm;
• Internal business perspective – what must the firm excel at;
• Innovation and learning perspective – can the firm continue to improve and
create value
They state (1993) that measurement is an integral part of strategy, stating:

Today’s managers recognise the impact that measures have on performance. But they
rarely think of measurement as an essential part of their strategy. For example,
executives may introduce new strategies and innovative operating processes intended to
achieve breakthrough performance, and then continue to use the same short-term
financial indicators they have used for decades, measures like return on investment,
sales growth, and operating income.

They maintain that the balanced scorecard is a way of evaluating performance which
recognises all the factors affecting performance and it is certainly true that an external
perspective, in the shape of customers, is included in this framework. The framework
they propose looks as in Figure 2.
■ The scorecard enables companies to balance their short-run and long-
run goals. It also highlights where results have been achieved by
trade off of other objectives.
The scorecard uses four perspectives from which to view the firm. These
are:
•Financial – How the company is perceived by the shareholders.
•Customers – How the company is perceived by its customers.
•Internal – What must the company excel at e.g. core competencies.
•Innovation & Learning – How can future value be created.
■ Each business that adopts the approach develops its own purpose built scorecard
that reflects its “mission, strategy, technology and culture”. The strength of the
system is that it measures the success in achieving the strategies cascaded down
by top management. There is often a divergence between mission statements,
strategies and performance measures. The scorecard offers a mechanism to avoid
this divergence.

■ The scorecard could, for example, take a mission statement that has a customer
focus and convert generally stated goals into specific objectives and then develop
associated performance measures. In this example the measurement system may
seek an interface with the customer’s management information system. If the
customer has a system for capturing data that assesses its suppliers the firm could
attempt to capture this information to enable it to judge its performance through
the customer’s eyes.
■ The scorecard could, for example, take a mission statement that has a
customer focus and convert generally stated goals into specific
objectives and then develop associated performance measures. In this
example the measurement system may seek an interface with the
customer's management information system. If the customer has a
system for capturing data that assesses its suppliers the firm could
attempt to capture this information to enable it to judge its
performance through the customer's eyes.
The environmental audit

■ Before the development of any appropriate measures can be

considered it is first necessary for the organisation to develop an
understanding of the effects of its activities upon the external
environment. The starting point for the development of such an
understanding therefore is the undertaking of an environmental audit.
An environmental audit is merely an investigation and recording of the
activities of the organisation in order to develop this understanding.
■ Indeed ISO14000 is concerned with such audits in the context of the
development of environmental management systems. Such an audit will
address, inter alia, the following issues:
■ • The extent of compliance with regulations and possible future regulations
■ • The extent and effectiveness of pollution control procedures
■ • The extent of energy usage and possibilities increasing for energy efficiency
■ • The extent of waste produced in the production processes and the
possibilities for reducing such waste or finding uses for the waste necessarily
produced
■ • The extent of usage of sustainable resources and possibilities for the
development of renewable resources
■ • The extent of usage of recycled materials and possibilities for increasing
recycling
■ • Life cycle analysis of products and processes
■ • The possibilities of increasing capital investment to affect these issues
• The existence of or potential for environmental management procedures to be
implemented
■ Such an audit will require a detailed understanding of the processes of
an organisation and so will be detailed and cannot be undertaken just
by the accountants of the organisation. It will also involve other
specialists and managers within the organisation who will need to pool
their knowledge and expertise to arrive at a full understanding.
Indeed one of the features of environmental accounting is that its
operation depends to a significant extent upon the cooperation of the
various technical and managerial specialists within the organisation
such accounting cannot be undertaken by the accountants alone.
The measurement of
performance
■ The measurement of performance is central to any consideration of
performance evaluation and this resolves into two areas for consideration,
namely why measure and what to measure. Measurement theory states
that measurement is essentially a comparative process, and comparison
provides the purpose for measurement. Measurement enables the
comparison of the constituents of performance in the following areas:
■ • Temporally by enabling the comparison of one time period with another,
■ • Geographically by enabling the comparison of one business, sector or
nation with another,
•Strategically by enabling alternative courses of action and their projected
consequences to be compared.
■ Performance itself is not absolute but rather comparative and it is essential in evaluating performance to be
able to assess comparatively in the nature of “better than expected’, ‘worse than the competition’ etc. It is not
possible to assess performance in other than these terms and so a quantitative approach to performance
evaluation is essential even if some aspects of performance are qualitative in nature. It is necessary therefore
that measurement is a constituent of performance evaluation and so it becomes necessary to determine what
should be measured in order to evaluate performance.

■ It is essential therefore to select appropriate measures for the purpose of the evaluation. It is argued however
that appropriate measures cannot be selected until the purpose of evaluation has been determined. It is
therefore again demonstrated that the foundation of performance measurement is the identification of the
reasons for the evaluation of performance, and this must now be considered. It is clear from the evaluation of
the literature, and a consideration of actual practice, that the evaluation of performance takes place for several
reasons.
• For control

• For strategy formulation

• For accountability
The evaluation of performance

■ A variety of measures exists to measure and evaluate performance, and while these have
been criticised in their efficiency by some writers, it is nevertheless true that such
measures have a role in this function. The efficiency of measures of performance can only
be determined however by considering their use in the measurement of performance
when the purpose of that measurement has been determined. It seems reasonable to
argue that different purposes need different measures and that perhaps some, but by no
means all, measures are universal in addressing all needs.

■ Measurements derive their meaning however from the use to which they are applied and
mismeasurement by using measures incorrectly causes conflict and misunderstanding.
Once a framework has been developed which identifies and addresses needs and
purposes of evaluation it is then possible to consider the efficiency and effectiveness of
existing measures and identify deficiencies in the measurement system. It is then possible
to develop and implement new measures which are appropriate to the purposes identified.
Multi dimensional performance
management
■ Probably the best known of the multi-dimensional performance
measurement frameworks is the balanced scorecard, which we have
considered. Another example is the service profit chain which
specifically considers three stakeholders namely employees,
customers and shareholders. Again this model specifically considers
the first two stakeholders as means to achieving superior financial
results.
Conclusion

■ Social and environmental accounting has a significant part to play in the management of an
organisation and the adoption of the techniques will have the following effects:
■ • Improved decision making within the organisation
■ • Better cost allocation, leading to improved decision making
■ • Better use of, and allocation of, resources within the organisation
■ • Improved operational performance
■ • Improved operational procedures, based upon greater understanding of the impact of activities
■ • Improved profitability, through either cost reduction or increased activity
■ • Greater support of investors and other stakeholders, through increased transparency and
disclosure leading to greater confidence
These effects are based upon the adoption of the principles of social and environmental accounting
but these principles need to be translated into action, in terms of the accounting and reporting
systems of the organisation. It is to this that we now turn.