Balanced Scorecard and Corporate Responsibility (discussion)

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SEU_ACT500_Module13_PPT_Ch14.pptx

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Chapter 14

The Balanced Scorecard and Corporate Social Responsibility

Performance Measurement Systems

Performance measurement systems are used by management to assess how well employees or units within a company meet the company’s goals and objectives.

A performance measurement system does this by using metrics (or measures) of current conditions or performance.

A metric or measure is a representation of something a person or company cares about.

Metrics like operating income and cash flows are often used by companies to measure their financial condition and performance.

Strategic performance measurement systems define and link strategic objectives to the performance metrics of a company.

The Balanced Scorecard (slide 1 of 2)

The balanced scorecard (BSC) is the best-known strategic performance measurement system.

The balanced scorecard emphasizes a balanced view of performance, thus its name, from multiple perspectives—not just financial.

For example, nonfinancial performance metrics such as customer satisfaction and employee training are included within the balanced scorecard.

Such metrics are often leading indicators of future financial performance.

The Balanced Scorecard (slide 2 of 2)

For example, if customer satisfaction for a movie theatre declines, sales for future months may also decline.

In contrast, actual sales is normally considered a lagging indicator.

Some companies call their strategic performance measurement systems balanced scorecards even if they do not include all of the elements of a traditional balanced scorecard.

Elements of the Balanced Scorecard

Performance Perspectives (slide 1 of 4)

Balance among Perspectives in the Balanced Scorecard

Performance Perspectives (slide 2 of 4)

The objectives of the performance perspectives are as follows:

Focus management on looking beyond typical financial measures of performance, such as sales and profits, and thus, encourage a more balanced view of performance.

Organize the scorecard into types of performance.

Performance Perspectives (slide 3 of 4)

Performance Perspectives (slide 4 of 4)

Strategic Objectives

Performance Metrics

Performance metrics are used to assess performance in achieving the strategic objectives.

At least one metric is used for each strategic objective.

Strategic Initiatives

Strategic initiatives are action plans that management implements to achieve the strategic objectives.

Slide 18 shows how these two strategic initiatives are directed at achieving the strategic objectives of train employees and improve delivery times.

Performance Targets

Using the Balanced Scorecard

Strategy Maps

A strategy map shows the expected cause-and-effect relationships among strategic objectives.

In doing so, a strategy map shows how each strategic objective contributes to the overall mission or strategy of the company.

Sometimes a strategy map is referred to as a value chain.

Measure Maps (slide 1 of 3)

A measure map shows the expected relationships among performance metrics.

These expected relationships are based on the strategy map, which links the strategic objectives.

Measure Maps (slide 2 of 3)

The measure map also shows which metrics are leading indicators and which measures are lagging indicators of performance.

Metrics that are early in the value chain are normally considered leading indicators, while metrics later in the value chain are normally lagging indicators.

A leading indicator can be any metric where performance is predictive of performance in another metric.

A lagging indicator can be any metric where performance is predicted by performance in another metric.

Measure Maps (slide 3 of 3)

The relationships shown in the measure map of Slide 33 are the same as the strategy map, with two exceptions.

The delight the customer objective is related to the two performance metrics of percentage of customers who shop again and online customer satisfaction rating. Both of these metrics are leading indicators for the two performance metrics of market share and operating profit.

The reduce shipping errors objective is related to the number of erroneous shipments. While this metric is not expected to significantly affect market share, it is a leading indicator for operating profit. That is, the costs of processing returns will decrease operating profit.

Strategic Learning (slide 1 of 4)

If the expected relationships are not supported by statistical analyses, management may need to adjust its strategic objectives.

This process of using performance metrics to verify strategic objective expectations and, if necessary, adjusting them is called strategic learning.

The lack of statistical support for a relationship among performance metrics does not necessarily mean that the strategic objective is flawed.

For example, the lack of statistical support may occur because the performance metric does not accurately measure the strategic objective. In other cases, there may be a time lag in how the performance metric measures the strategic objective.

Strategic Learning (slide 3 of 4)

Of the possible reasons for the unsupported relationship, Reason 1 and Reason 2 do not seem logical.

Customer satisfaction should lead to an increase in customers, sales, and profits (Reason 1).

Operating profit is a direct measure of increasing profits (Reason 2).

Online customer satisfaction rating is a poor metric for increasing profits (Reason 3), as summarized in Slide 44.

Scorecard Cascading

Cognitive Biases

Decision making with the balanced scorecard may be subject to cognitive or psychological biases.

A cognitive bias results in decisions that are not economically accurate or rational.

Some of the cognitive biases that may affect the use of balanced scorecards are as follows:

Motivated reasoning

Surrogation

Common measures bias

Motivated Reasoning

Motivated reasoning is the tendency for a person to see what they want to see in data. The reason people are susceptible to motivated reasoning is that they want to feel good about themselves.

As a result, they convince themselves that data they are looking at tell them what they want to hear. People subject to motivated reasoning tend to do the following:

Ignore bad news

Rely too heavily on good news

Stop gathering information when results look good

Continue searching for good news when things look bad

Interpret ambiguous news as good news

Surrogation

Surrogation is the tendency to behave like the performance metrics are the strategic objectives.

Common Measures Bias

Companies may use balanced scorecards for evaluating the performance of their divisions. In such cases, the scorecards for different divisions are often similar, but not identical.

When managers compare the performance of divisions within a company, they may ignore performance metrics that are unique to individual divisions.

Instead, managers may focus on common performance metrics for all divisions. This bias is called the common measures bias.

A result of the common measures bias is that it ignores the unique features of divisional scorecards. This can lead to inaccurate assessments of divisional performance.

Corporate Social Responsibility

Corporate social responsibility (CSR) describes the efforts of companies to take responsibility for the impact their operations have on society and to improve social well-being within and outside of the firm.

CSR activities can include far-reaching issues such as reducing global poverty and protecting the environment.

When CSR activities involve ensuring the ability to meet current needs without compromising the ability of future generations to meet their needs (such as with efforts that protect the environment), the CSR activities are referred to as sustainability efforts.

Sometimes the terms CSR and sustainability are used interchangeably.

CSR Activities

Category	Description	Examples
Agriculture	Farming and ranching techniques that do not damage or disrupt the environment	Mixed farming, crop rotation, multiple cropping
Energy	Generating energy with little or no pollution	Wind turbines, solar power
Engineering and construction	Designing and constructing buildings that are highly efficient in using natural resources while minimizing pollution	Recycled building materials, high-efficiency heating and cooling systems, renewable energy generation
Transportation	Using transportation methods that result in little pollution and have a minimal impact on the environment	Expanded public transportation systems, green vehicles, biofuel-powered vehicles
Waste minimization	Recycling and reuse practices that reduce the amount of waste disposed in landfills	Curbside recycling collection, composting, reusable products (e.g., water bottles)

CSR Reporting (slide 1 of 2)

CSR and sustainability information can provide important feedback to guide a company’s strategic and operational decision making.

Managers can use this feedback to increase revenue, control costs, and allocate resources efficiently.

For example, eco-efficiency measures are a form of CSR information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations.

Eco-Efficiency Measures

Energy efficiency	Energy cost savings from replacing lighting fixtures in a production facility with energy-efficient lighting
Material use efficiency	Materials cost savings from reducing the amount of product packaging materials
Fuel efficiency	Fuel cost savings from replacing gas-powered vehicles with hybrid or alternative energy vehicles
Waste efficiency	Waste removal cost savings from recycling and reusing waste and byproduct materials

CSR Reporting (slide 2 of 2)

The Global Reporting Initiative is an international organization that develops and encourages the use of sustainability reporting standards.

Many corporations use a triple bottom line approach to their sustainability by reporting on the following:

Financial performance

Social performance

Environmental performance

Corporate Social Responsibility and the Balanced Scorecard

A balanced scorecard, which links all of the company’s strategic objectives together, is helpful in integrating CSR activities into the core strategy of the company.

In doing so, companies may include CSR activities in a separate corporate social responsibility performance perspective.

Other companies integrate CSR strategic objectives into the four perspectives (learning and growth, internal processes, customer, and financial) of the balanced scorecard.

This creates what is sometimes referred to as a sustainability balanced scorecard (SBSC).

Sustainability Balanced Scorecard (SBSC)

Encouraging Corporate Social Responsibility

To be successful, a balanced scorecard must encourage managers and employees to achieve strategic objectives.

Tying manager and employee compensation directly to performance metrics and targets encourages and motivates managers and employees to achieve strategic objectives.

CSR activities are often used by recruiters to hire top talent interested in making a difference beyond the traditional financial results.

Management must carefully consider the trade-off between intrinsic motivation and incentive compensation, especially when attempting to motivate CSR-related performance.

Capital Investment in CSR

To implement CSR practices, significant capital investments are often required.

CSR investment proposals can be analyzed using managerial accounting methods.

The benefits of some CSR investments may be difficult to measure and, thus, must be evaluated qualitatively.

CSR investments may be legally mandated and, thus, are justified more by the requirements of the law than by their immediate economic benefits.

Examples of CSR Capital Investments

CSR Objective	Capital Investment Example
Minimize resource waste and environmental degradation	A mining company invests in land, soil, and water reclamation projects.
Develop new sustainable markets	A consumer products company invests in equipment to produce environmentally friendly cleaning products.
Reduce litigation risks	A paper mill invests in wastewater recycling to avoid the potential legal liability for river contamination.
Maintain an attractive and safe working environment	A software company invests in an employee wellness and fitness center to attract and retain high-performance employees.