A Bigger Yardstick for Company Performance
Financial Times (10/16/00) Vol. 104, No. 41 p.2; Ittner, Christopher; Larcker, David

Two members of the accounting faculty at the Wharton School investigate the pluses and minuses of the move toward using non-financial measures of performance, like "intangible assets" or "intellectual capital." Based on a survey of U.S. financial-services companies, the authors say these performance measures offer better connections to long-term strategy, may be more closely tied to drivers of success than financial measures, may offer better signs of future financial performance, and may help identify which performance improvements are tied to actions of specific managers. There are some potential problems, however. Implementing non-financial measures can be overly costly and time-consuming, the non-financial measures suffer from a lack of common standards, they may not always have clear causal links between accounting and stock performance, they can be statistically unreliable, and there may be too many measures for managers to handle. Companies that want to move to non-financial measures should start by getting a grasp on what drives value for the company. Then, they should evaluate the measurements they currently use and analyze whether the importance placed on each measurement corresponds appropriately with the strategic importance of the information that the measurement measures.


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