Valuing non-financial performance

John Swannick Executive Director EABIS

A framework for company and investor dialogue
“I hope that the work of this laboratory can contribute to a quiet revolution in the way that enterprises who wish to can measure and communicate their non-financial performance, allowing investors and other stakeholders to use such information in their decision making processes. There is indeed no other powerful incentive to consider the strategic role of corporate responsibility than an investor able to value the role that it plays for the future prosperity and sustainability of a business.”
Gunter Verheugen Vice President of European Commission 4th December 2008

Market value

Source: Accenture 2004

Brand and asset value

.....and increasing volatility?

Employee engagement

A 12-month study across 50 global companies

A three-year study across 40 global companies Source: ISR-Towers Perrin

Top 10 Engagement Drivers (2007)
Top Ten Global Engagement Drivers 1. Senior management interest in employee well-being

2. Opportunities to improve skills and capabilities
3. Organization's reputation for social responsibility 4. Input into decision-making 5. Organization quickly resolves customer concerns 6. Setting high personal standards

7. Career advancement opportunities
8. Challenging work assignments that broaden skills 9. Good relationship with supervisor 10. Organization encourages innovative thinking
Source: Towers Perrin 2007 Workforce Study — Global

Engagement – key drivers by sector
(ISR survey 2006)

Chemicals Supportive Culture

FMCG
Leadership

Pharmaceuticals

Logistics Image and Corporate Sustainability

My Job Corporate Responsibility & Integrity

Social Responsibility & Image Competitive Position

My Job

My Work

Organisational Responsibility

Leadership

Customer Focus

Employee Engagement

The Institute of Business Ethics’ ‘Does Ethics Pay’ research showed a relationship between NFP and p/e ratios. In this case, ethical performance and p/e ratio stability ( strong outperformance).

The blockages

The blockages

Valuing non-financial performance: the collaborative venture
Regulatory Influence
ESG Disclosure Investor salience

Company performance
Measurement Management Integration

Investor value
Core drivers Materiality

The company project
• What is the company strategy? • How does NFP support the strategy? • How should NFP support the strategy?

Strategy

• Who manages NFP? • How is it managed? Management • What are the performance improvement processes?

Results

• What are the company’s Key Performance Indicators? • How does NFP relate to the company Key Performance Indicators? • How can NFP drive performance improvement?

The desired flightpath?

Strategic

Integration
Delivering performance improvement through core management processes

Results linked to core business strategy and KEY Performance Indicators

Maturity
Coherence in measurement AND management of non-financial performance

Phase 1: initial conversations

16 companies 10 different sectors

Common core areas: perception indicators

Employees

Satisfaction

Engagement

Customers

Satisfaction

Advocacy

Public

Opinion

Reputation tracking

Common performance indicators

Environment

• Emissions • Waste • Resource use

Innovation Corporate Governance

• R&D investment as % of revenue • New products

• Code of ethics/conduct • Code implementation & KPIs

The big challenge

KEY KPIs

• • • • • • •

Total shareholder returns Earnings per share Revenue EBITDA Free Cash Flow CAPEX Net assets

Investor Value
• Working group of asset managers • Comparison of quantitative and qualitative analysis of non-financial drivers of financial performance Convergence • Identify ‘long list’ of core non-financial drivers

Consensus

• Test long list with wide group of asset managers • Quantitative assessment of materiality • Identify short list of ‘superfactors’

Validation

• Test ‘superfactors’ with asset owners • Promote results to mainstream investors