25/11/2017

WHAT ARE WE LOOKING AT:

BREAKING DOWN NON-
FINANCIAL PERFORMANCE
OF A COMPANY
ELVIA R SHAUKI
FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF INDONESIA
elvia.shauki@icloud.com

PROBLEMS and FACTS WITH THE EXISTING

SHARE VALUE ASSESSMENTS

 Too short-term oriented; and

 Bottom-line oriented;
The findings made by Ernst and Young Centre for Business Innovation indicate
that major investors decisions were significantly influenced by non-financial
performance information.
It turns out that over a third of the typical investors’ allocation decision is
attributable not to the financial but to other information on performance areas
perceived to be leading indicators of future profitability.
These includes: (1) perception of company’s strategic vision and the
company’s ability to execute against it; (2) the credibility of the management;
(3) the prospects of innovations; and (4) the ability to attract talented people;
etc. etc.

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PROBLEMS and FACTS WITH THE EXISTING

SHARE VALUE ASSESSMENTS

 Those analysts who rely more heavily on non-financial

information are the ones producing the most accurate
earnings forecasts;
 The types of non-financial information influencing
investors varies substantially and predictably according
to the industry under consideration;
 The data produced by the study allowed researchers to
model the impact of a perceived change in non-
financial performance (positive or negative) on a given
company's share price.

Findings: Non-Financial Measures Do

Matter
Investors do not rely simply on past financial
performance to assess prospects for future
success;
The best of them owe their prescience to a
deeper understanding of the business model of
a given firm and a superior ability to gain
insight into the performance of key, leading-
indicator areas.

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NON-FINANCIAL FACTORS RANKED BY

INVESTORS
 Execution of corporate strategy (1);
 Management Credibility (2);
 Quality of Corporate Strategy (3);
 Management Experience (7);
 Quality of Organization Vision (16);
 Alignment of Compensation with
Shareholder Interests (8);
 Performance-Based Compensation
Policies (12);
 Ability to Attract and Retain Talented
People (5);

 CEO Leadership Style (24);  Research Leadership (9);

 Innovativeness (4);  Quality of Major Business Processes (10);

 Market Share (6);  Customer Satisfaction Level (11);

 Brand Image (13);  New Product Development Efficiency

(14);
 Strength of Marketing and Advertising
(21);  Customer Perceived Quality (15).

 Global Capability (22);

HOW ABOUT CSR RELATED ACTIVTIES

 Social Performance (see a case of Nike in China and the banned made by
AFL, Garment Industry in Bangladesh, and the Chinese Fur Industry with its
European Market):
 Child Labour Restrictions;
 Exploiting Woman Labour;
 Environmental Performance (see Coca Cola’s Case in India, see a case of
PT LAPINDO BRANTAS in East Java, and a case of PT SEMEN INDONESIA in
Central Java);
 Governance Factors (see a case of Enron, Salomon Brothers, and National
Australia Banks); and
 A lot more.

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IN TERMS OF GOVERNANCE AND

ETHICS

 Sims (2000), Sims and Brinkmann (2002, 2003) and Dellaportas and Alagiah
(2007). These authors demontsrate how mismanaging organisational culture
can have devastating effects. Sims and Brinkman (2002) examined the
case of Salomon Brothers and the role played by John Gutfreund, the CEO
of the Investment Banking Division at Salomon Inc., at the time of its bond
trading scandal in 1991. The authors link Gutfreund’s irresponsible
leadership style to a win-at-all-costs culture at the bank, which led to the
unethical and illegal behaviour of its members. Sims (2000) describes how
Warren Buffet, after displacing John Gutfreund as the CEO, successfully
changed the culture at Salomon Brothers following the bond fiasco.
However, Gutfreund‘s style was so ingrained in the culture of Salomon that
simply removing Gutfreund was not enough.

IN TERMS OF ENVIRONMENTAL
PERFORMANCE

 On June 19, 2014 Coca-Cola closed the bottling plant in India due to excessive
use of water (Tengku Bahar, 2014, https://www.rt.com/news/167012-coca-cola-
factory-closed-india/). The closed factory is one of the Coca-Cola factories
located in India called Uttar Pradesh.
 Community protests have led to the closure of the Coca-Cola bottling plant in
the northern province of Uttar Pradesh as it is suspected of taking groundwater
above legal limits and polluting the environment with toxic waste. Coca-Cola's
Mehdiganj plant in Varanasi in its operation pumps significant amounts of fresh
water from underground water tables, a practice that causes groundwater
levels in the area to drop to a very critical level. (Avantika Chilkoti, 2014, https:
//www.ft.com/content/16d888d4-f790-11e3-b2cf-00144feabdc0). People who
mostly work in agriculture suffer from a lack of water resources. The plant has
also been accused of disposing of waste, containing excessive pollutant levels,
damaging the environment.

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SO, WHAT ARE THE EXPECTATIONS?

Include these Non-Financial Performance

indicators as important as the Financial
Performance Indicators in your analysis;
Provide Risk Assessment and its impact
on the Valuation of the Company’s Shares
as based on these Non-Financial
Performance Indicators.