KPIs vs strategic priorities

27 September 2017

My end of summer reading included the proposed amendments to the FRC’s Guidance on the Strategic Report and I was pleased to see some development on an issue that often causes me to sigh when I read a report. As the FRC put it:

‘The discussion of KPIs should allow an assessment of the entity’s progress against its strategy and objectives’.

Having KPIs that measure the performance of the company against its strategy seems fairly logical to me but, with our research suggesting only 48% of the FTSE 100 are explicitly demonstrating the linkage of KPIs to strategy, there is clear room for improvement.

But what if there is no clear relevance of the KPIs to the strategy? This is a challenge our latest publication, KPIs and the link to strategic objectives, considers. Of the 34 companies we reviewed, the relevance of the KPIs to the strategy was clear for only 20 (59%) regardless of whether an explicit link was visible. For the remaining 14 companies it left us wondering why those measures are highlighted as KPIs. We believe it should be an easy win for companies to simply explain why they have used the KPIs they have. It would really aide understanding and avoid confusion, particularly where companies badge data points as KPIs to support their short-term success stories which may send the wrong signal of what the board is thinking about.

In light of the new non-financial reporting regulations, our research also took a closer look at certain non-financial topics. This deeper dive really highlighted the lack of linkage between strategy and non-financial measures where, for example, only 24 companies in the FTSE 350 with an environmental KPI also have an environmental strategic theme.

Beyond simply explaining the linkage, our challenge to companies is whether they could provide better insight with KPIs that focuses on outcomes of their activities rather than simply quantitative facts. Again this ties in well with the requirements of the new non-financial reporting regulations which require companies to report on the ‘impact of their activities’, and with the FRC’s proposed amendments to the Strategic Report guidance:

The KPIs used in the analysis should be those that the directors judge are most effective in assessing progress against objectives or strategy, monitoring principal risks, or otherwise utilised to measure the development, performance or position of the entity or the impact of the entity’s activity.

We question whether many companies have existing KPIs that reflect the impact – definitely an area to consider in the next reporting cycle! But is it a quick fix?

The apparent lack of linkage begs another question as to whether this is just a reporting issue. Conversations we have with clients suggests it is not and that reported KPIs are not always the measures being discussed internally – but why is this? Could it be because management don’t have/ lack confidence in some of the data? We don’t believe this should prevent transparency in reporting though. Some companies, for example Pearson, have explained where they don’t have the data they want and what they are doing to resolve that.

We believe there is a real opportunity for companies to truly demonstrate that they are measuring what matters. The key to doing this is to have a clear understanding internally about what the KPIs are and to be transparent about their relevance to strategy, externally. Hopefully this consistency will also help companies to tell a more coherent story about their ongoing performance and to be clear about their plans over the medium to long-term in order to ensure they are able to report to demonstrate strategic success and accountability.

Sarah Allen | Corporate Reporting Senior Manager

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