A Stakeholder Approach to Strategic Performance Measurement

TLDR: In this paper, the authors define two groups of stakeholders: environmental (customers, owners, and the community) and process (employees and suppliers) and propose a performance measurement system to evaluate all processes based on their contribution to achieving secondary objectives.

Abstract: Traditional accounting-based performance measurement systems are unsuited to current organizations in which the relationships with employees, customers, suppliers, and other stakeholders have changed, say these authors. Established measures lack the focus to evaluate intangibles such as service, innovation, employee relations, and flexibility. A stakeholder approach to performance measurement captures strategic planning issues, while the choices a company makes in strategic planning direct the design of the performance measurement system. Atkinson et al. define two groups of stakeholders: environmental (customers, owners, and the community) and process (employees and suppliers). The company exists to serve the objectives of the stakeholders, which become its primary objectives. What the company expects from and gives to each stakeholder group to achieve its primary objectives are its secondary objectives. The company must plan for and negotiate explicit and implicit contracts with stakeholders and evaluate whether the plan meets the expectations of all stakeholders. Employees design, implement, and manage processes to achieve the secondary objectives, expecting the primary objectives to result. Therefore, according to the authors, the company's performance measurement system must evaluate all processes based on their contribution to achieving secondary objectives. In their view, the system, which is the heart of a company's control system, must: 1. Help evaluate whether the company is getting expected contributions from employees and suppliers and returns from customers. 2. Help evaluate whether the company is giving each stakeholder group what it needs to continue to contribute. 3. Guide the design and implementation of processes that contribute to the secondary objectives. 4. Help evaluate the company's planning and implicit and explicit contracts with its stakeholders. Performance measurement has a coordinating role, in which it directs attention to the company's primary and secondary objectives. It has a monitoring role, in which it measures and reports performance in meeting stakeholder requirements. And it has a diagnostic role, in which it promotes understanding of how process performance affects organizational learning and performance. The authors examine the performance measurement system at the Bank of Montreal, whose objective was to maximize long-term return on investment for shareowners. The bank wanted its system to: 1. Focus decision makers on what drives success. 2. Help management understand and communicate to people outside and inside the bank what contributes to primary financial objectives. 3. Diagnose what drives current profitability. 4. Form a basis for performance management. The authors' model is a vital system that includes both financial and nonfinancial measures of performance to help an organization's members understand and evaluate the factors for success.