THE HUMAN FACTOR
More CFOs in Asia are turning to non-financial metrics to help gauge - and boost - corporate performance.
By Elizabeth Fry

Ask a well-educated, experienced financial manager like Simon Lam to name the most important factor in assessing corporate performance, and you expect the Motorola Asia Pacific CFO to rattle off the usual suspects. Return on investment. Earnings per share. Return on equity. Economic Value Added. What you don’t expect Lam to tell you - but what he does tell you - is that at Motorola, the single most reliable measure of company performance is the level of employee loyalty.

That’s right, employee loyalty. And surprisingly, Lam is not alone. These days, a small - but growing - number of finance managers in Asia are turning to non-financial measures to help them get a fix on how their companies are doing. Some of these CFOs say that sizing up intangibles like intellectual capital and employee expertise give them a better sense of their companies’ competitive advantage over rivals. Others say that looking at non-financial elements like customer complaints and market share sharpens their focus on product quality. Still others, like Motorola, track worker satisfaction. All have one thing in common: they are placing a value on the human factor.

Of course, such valuing is not necessarily an easy task. Determining which non-financial factors to track - and how to accurately measure them - can be a difficult, time-consuming chore for a CFO. What’s more, convincing senior managers of the merits of non-financial metrics can be like pulling teeth. But some finance managers in the region say the economic crisis is changing that. Afterall, looking at earnings per share figures in the middle of the worst economic recession in Asia in decades can be downright depressing. Even Asia’s best-managed companies have been dragged down by the recent meltdown in the region, and the fact is, a benchmark like return on equity may not tell the entire story of how a company is doing. Some CFOs say, with the crisis in full force, non-financial metrics often give them a much clearer view of what’s really going on at their companies - a view they can then share with their CEOs when shaping corporate strategy.

Indeed, a number of finance managers in the region say, crisis or not, non-financial metrics simply help them do their jobs better. This seems to echo the sentiments of scores of CFOs at US corporations, many of whom started adopting non-financial metrics following the 1996 release of The Balanced Scorecard, a book detailing the value of non-financial metrics in implementing corporate strategy. CFOs in the US note that tracking less traditional benchmarks like customer satisfaction often helps them identify the real drivers of corporate profitibility. Thus, they say non-financial metrics not only measure company performance - they can be used to boost it. What’s more, some American CFOs point out that, while traditional financial yardsticks are good at indicating what has happened at a company, they’re not so hot at predicting what’s going to happen. But when non-financial metrics are tied to the performance evaluations and compensation of employees, these CFOs say they are able to make much more accurate corporate forecasts. That, in turn, makes the budgeting process easier. Anything that makes budgeting easier is earth-shattering news for CFOs. In addition, when non-financial metrics are combined with financial metrics - the heart of the balanced scorecard - corporate strategy can be defined, refined, and implemented.

All of which raises the question: why aren’t more finance managers in Asia embracing non-financial metrics? The problem, some observers point out, is that basing corporate strategy on vague human factors like employee loyalty and worker satisfaction requires a huge leap of faith - a leap many conservative numbers-crunchers in the region are not yet willing to make. Even Lam admits that the lack of hard data keeps some finance directors in the region from trusting non-financial numbers. "Linking non-financial metrics to earnings projections, and then to strategic targets is a big leap for most CFOs," he says. "Most are wary of moving away from traditional accounting practices. They still budget on the basis of cost, rather than strategic objectives and goals." For those CFOs, the balanced scorecard remains more a novelty than a reality. Says Robert K. Monette, CFO of 3M’s Asia Pacific operation based in Singapore, "The practice of linking (non-financial metrics) to corporate strategy is still in its infancy."

Grading the Boss

A new study released by professional services firm Ernst & Young may just change that. According to the study, which examined the investment habits of 275 leading institutional investors, fully a third of the information shaping the investment decisions of fund managers was non-financial. The most important non-financial factors for these powerful portfolio managers: a company’s management credibility, its innovativeness, and its ability to attract and keep good employees. The survey also found that those analysts who relied most heavily on non-financial corporate data produced the most accurate earning forecasts. More importantly, the Ernst & Young study survey found that a company’s share price correlated directly with investor perception of the company’s non-financial performance.

While this should come as big news to CFOs, is nothing new to Mark Konyn, a director of Dresdner RCM Global Investors, which manages US$225 billion in funds worldwide. By his lights, Konin says there is no question that non-financial factors affect a company’s share price. In fact, he believes, non-financial metrics are just as important as financial data in determining asset allocation. Not surprisingly, Dresdner has formally integrated non-financial metrics into its investment process. "When we vote on whether a company goes into a portfolio, the views of the non-financial research team are on an equal footing to the financial analysts," says Konin. "It is critical that we know how a company’s products and services are being received in the market place and how the company is perceived by its distributors, suppliers, and ultimately, its customers."

Apparently, managers at Motorola Asia Pacific, the regional arm of the US$30 billion-in-revenues US communications and electronics giant, see it the same way. The company has identified improving customer relationships as a vital corporate goal. That, of course, may not exactly qualify as out-of-the-box thinking. Most corporate managers know that customers are important. What is unusual, however, is that, at Motorola, managers believe the best way to keep customers satisfied is to keep employees satisfied. Toward that, managers at the company regularly reverse the employee review process, asking each employee to score their bosses. Workers are encouraged to be frank about their complaints, to report on how they’ve been treated by superiors, and to discuss whether their getting the training they feel they need. The exercise is mandatory, regardless of seniority. "How excited employees are about their future is a very big part of this," says CFO Lam. "Employees are encouraged to say if they have any doubts about their future with Motorola."

Complaints don’t just get thrown in the waste-paper basket, either. Once the report cards are in, senior managers pour over the results, looking for leads on how to improve staff/management relationships. "We extract yes or no answers to a number of specific questions," says Lam, "which allows us to form a matrix." The approach, while painstaking, seems to be working. Lam says the company can directly tie employee satisfaction to improved job performance and increased tenure. And those kinds of assets, he says, can’t be captured in an annual report. "You cannot put our people into the balance sheet," Lam says.

Whirlpool, the US appliance manufacturer and retailer with revenues of US$8.6 billion, also looks to its employees to help chart corporate performance. To get a handle on whether the company is meeting its strategic objectives, the company’s Asia Pacific operation uses a balanced scorecard. In essence, a balanced scorecard - which contains a set of non-financial and financial measures - links strategic goals to a set of basic business drivers, such as compensation, promotion, and quality control.

To create the scorecard, Whirlpool’s managers initially gathered non-financial data, including feedback from employees, customers, dealers and distributors, as well as market share information and product availability. Each month, the company sends the scorecard to customers and employees, asking them to rate management’s performance. This data is then tallied, and the results are distributed to all employees. "Everyone is on the scorecard, so you get insights into what everyone is doing," says Felicia Pang, Whirlpool’s Singapore-based director of finance. Pang believes the scorecards are crucial to the company’s success. "To me there is no question that they are driving the results you achieve."

Of course, Pang says the decision to include customers, suppliers and vendors in the evaluation process can lead to a mountain of paperwork. Every customer service request at Motorola has to be tracked and logged, including the nature of the initial call, how it was dealt with, and how quickly the problem was resolved. In addition, all requests from suppliers and vendors must be duly noted. Not surprisingly, the data needs to be thoroughly sifted or it can prove to be useless. Explains Steve Freeman, CFO of Whirlpool’s Asia and Latin America operations: "A supplier might be calling for an early payment, which you probably won’t want to do. Or, payment might have been made and there is a dispute."

Still, Freeman thinks that getting to the root of these calls provides valuable insight into the company’s day-to-day operations. Such insight, he says, can generate tangible financial rewards. Freeman says, by looking at the data for a few months and drawing statistics from it, he is often able to help employees fix some of the problems - sometimes permanently. "When you come to look at it the following month, you might find the numbers [of incidents] have gone down," he says. "So you have used the information to improve the process, and that will very likely improve your financial result." Pang also notes that Motorola relies on non-financial metrics when making strategy decisions. She points out that by including non-financial data in ‘what if’ scenarios, for example, the risks of a plan of action become more obvious. "Non-financial metrics make decision-making easier when we go through the exercise of: If we do this, what are the implications for the market or for the competition?" she says.

Drilling Down, Laying Bare

If finance managers like Whirlpool’s Freeman and Motorola’s Lam sing the praises of non-financial metrics, they also acknowledge that establishing the benchmarks can be laborious stuff. Indeed, the mere process of settling on which non-financial factors to track can drive a CFO to distraction. To get the full strategic wallop from tracking non-financial factors, Freeman believes corporate managers need to give careful consideration to identifying factors that enhance shareholder value. "It really depends on what you decide drives performance, results and share price," he explains. "They need to be linked so they constantly reinforce each other." But for his part, 3M’s Monette believes it doesn’t really matter which non-financial performance metrics companies use, as long as employees at all levels can easily understand and identify with them. Monette says obvious candidates include how quickly products are shipped and how fast complaints are resolved. "In short, all the day-to-day tasks that management is removed from once companies get bigger," he explains.

Mabhukar Ahuja knows all about those tasks. Ahuja, the finance director for Johnson & Johnson’s operations in Singapore, Indonesia, Malaysia and the Philippines, says his company recently adopted several non-financial metrics to better manage its supply chain. While he says it was an eye-opening experience, he can understand why so many CFOs in Asia shy away from non-financial metrics. "People are aware of the link between non-financial indicators and financial results, but they are skeptical because they see it fail," he explains. "This generally happens when companies try and measure too many processes just for the for the sake of implementation."

Instead, Ahuja advises CFOs to focus on just three to five processes. "It’s a top-down exercise and people have to believe that these are the processes management is focusing on," he says. Finding a company’s critical non-financial factors, he says, requires that a CFO drill down to the underlying cause of leading financial indicators, laying bare the non-financial drivers behind them. For Johnson and Johnson, a US healthcare specialist with revenues of US$23 billion, that drilling down led to the selection of three key non-financial measures: product cycle time, customer complaints, and staff turnover. Finance Director Ahuja says he’s had no trouble linking improvements in those three non-financials to cash returns, either. "The impact on financial ratios may not be 100 percent precise," he says, "But they will be 90 to 95 percent."

Not all CFOs would agree. Although finance managers at regional divisions of multinationals make up the biggest group of believers, CFOs at local companies seem less convinced. William Ho, for one. Ho, the CFO at VTech Industries, a maker of electronic educational products for children, says he is currently more concerned with controlling overhead than new management tools. Having served several years at Philips Electronics Asia Pacific before joining VTech, Ho is no traditionalist. He has, for example, pushed for a close working relationship between finance and business units at VTech. But, he points out, each unit still operates autonomously, setting its own financial targets and devising its own measurement criteria. That doesn’t leave much room for setting up corporate-wide non-financial metrics. "We won’t be putting it [non-financial metrics]on the agenda. There will not be a corporate policy," he says flatly.

Still, Ho does acknowledge that funds managers increasingly raise a lot of questions about non-financial performance. But he insists their interest in product development or customer satisfaction is nothing new. "They ask about these things all the time," he says, "but they’re not specific about the measurement method," he says. "They just want to understand the company and the management."

A CFO of another large Hong Kong-based electronics company sides with Ho, noting that the lack of common reporting standard makes it difficult to feed non-financial information to stakeholders. The CFO says companies are so diverse that determining a uniform set of drivers is a nearly impossible job. "Even when non-financial data is available, it might not be comparable," he says. "And analysts and investors might not have the skills or industry knowledge to make inter company or international comparisons and draw sensible conclusions." But Freeman disagrees. "No one in their right mind is going to ask you to put a number on the improvements that come from non-financial metrics," he concedes. "But equally, no one is going to dispute that they added value."

Not analysts, that’s for sure. While standards for reporting non-financial performance may not exist, the fact is, portfolio managers and analysts are making crucial investment decisions based on the non-financial performance of companies. CFOs need to get used to that notion. What’s more, if institutional investors believe non-financial data helps them make better investment decisions, you’d better believe they will get the data - one way or another. Says Tony Siesfeld, research leader at the Ernst & Young Center for Business Innovation and co-author of the recent study of institutional investors: "What’s horrifying is that both buy-side and sell-side analysts will get that information whether CFOs release it or not," he notes. "If they refuse to hand it over, the analysts will create it."

For CFOs in Asia, the message is clear. When it comes to the human factor, what you don’t measure can hurt you.

Elizabeth Fry is a contributor at CFO Asia.