Boards need better information.

• Author: Eccles, Robert G.
• Position: Corporate boards

Increased access to nonfinancial measures of performance will enable directors to better advise management and represent the interests of shareholders.

In collaboration with Sarah Mavrinac, a doctoral student at Harvard Business School, I have recently completed a national survey of 600 corporate managers, 200 financial analysts, and 200 portfolio managers and investors about the corporate disclosure process. This study clearly shows that all three groups believe that the market is too short-term oriented and focuses too much on a company's quarterly earnings. At the same time, the information that managers work hardest at reporting, and that analysts and portfolio managers think is most important, is largely financial in nature and compares the company's performance on these measures with last year's performance rather than with external competitors' performance.

This emphasis on short-term measures of financial performance reinforces the short-term orientation of the market. The result is inefficiencies in the capital allocation process and inaccuracies in share valuation.

The solution to this problem is to place more emphasis on nonfinancial measures, particularly those that are leading indicators of long-term financial performance and have more of an external orientation. To some extent this occurs already.

Corporate managers rank customer satisfaction third in a list of 19 performance measures (earnings and cash flow are ranked first and second, respectively, and segment performance and costs are ranked fourth and fifth, respectively). The top five performance measures for financial analysts are:

1. earnings 2. cash flow 3. market growth 4. segment performance 5. market share

   Market growth and market share are externally oriented nonfinancial measures. For portfolio managers the rank order is:

1. market growth 2. cash flow 3. earnings 4. new product development 5. costs

   New product development is an internal nonfinancial measure.

   The fact that managers rank customer satisfaction very high in importance, and financial analysts and portfolio managers rank it much lower (13th and 11th, respectively), is evidence of the communications gap that exists between companies and the market. In fact, the extent of this communications gap is the single most important finding of our study. Further evidence of its existence is the fact that managers report that they are doing a much better job of disclosing information than analysts and portfolio managers believe they are.

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