02/05/2016

Beyond GDP, beyond profit: Measuring business success today

Author: Patrick Lenain, OECD  Patrick-photo

We face a great puzzle. We are living through a period of rapid technological change, which is creating many new opportunities. Yet there is widespread feeling that this has not translated into better lives, and popular discontent is noticeable. This has led to scepticism about traditional ways to measure economic data, and statisticians are now revising their frameworks to assess life satisfaction. CEOs also need to go beyond traditional financial benchmarks to assess corporate performance, as they agreed in PwC’s recent annual survey.

Beyond GDP: How to measure wellbeing?

Take GDP – the traditional way to measure economic progress. It has increased in most countries, which should translate in higher incomes and greater happiness. In the United States, annual GDP per household after inflation is about US$4,200 higher than before the crisis. Yet, life satisfaction has not improved in parallel, as reported by the latest World Happiness Report published by the United Nations sustainable development solutions network. Happiness has also stagnated in Canada and the United Kingdom, despite good economic performance.

In part, this reflects rising income inequality, which translates in stagnant incomes for the middle class. But there is more. It also reflects the lack of attention to what matters for most families. The OECD now publishes non-monetary indicators of well-being – such as health, jobs, housing, education and pollution. They show that American households often struggle with their work-life balance due to long working hours and commuting time, and limited access to employer benefits such as sick and parental leave.

Well-being is high in the United States, apart for work and life balance

Patrick'a blog

 

Source: OECD Better Life Index, 2015 and Economic Survey of the United States, 2014.
Note: 0 = lowest OECD ranking; 10 = top OECD ranking

Beyond financial performance: How to measure business impact on society?

Businesses are also looking into new ways to measure their impact on society. Take, for example, the environmental footprint of business activity. Environmental degradation is worrying – global warming, rising sea levels, water stress, air quality – and no business can ignore it. Next to financial reports, most companies now report their environmental footprint. Corporate information about environmental sustainability need to be trustworthy because breaching this trust can severely harm shareholder value – witness the problems experienced by several carmakers with allegations that they used “cheat software” to hide high levels of air pollutants.

Environmental reports are a good first step, and more can be done. Businesses impact society in many other ways – tax payments, labour earnings, employee benefits, working conditions, talent diversity and social investments. Facebook CEO Mark Zuckerberg is contributing to the debate on equality and social mobility, while companies such as GE, Intel and Exxon Mobil are promoting common education standards in US schools.

This matters increasingly for investors. Norway’s Global Pension Fund selects its investments based on business ethics. Private pension funds pay increasing attention to business conduct. Morningstar will soon rate mutual funds according to environmental, social and governance standards. Focusing on non-financial aspects of corporate performance, CEOs can improve long-term shareholder value.

Patrick Lenain leads OECD country economic studies. He has extensive experience in providing advice to governments of a variety of countries in Europe, Asia, Latin America and the United States. He is also Adjunct Professor of Economics in Paris and a regular guest speaker on global challenges.

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