If it matters, measure it: the importance of good quality MI for governance decision making

In 2016, Wells Fargo, a US Bank was fined $185 million dollars for an “outrageous” sales culture[1]. Then in 2020, Rio Tinto, an Australian mining company, inadvertently destroyed Juukan Gorge, a 46,000-year-old Aboriginal sacred site. More recently in 2021, Standard Chartered, a British multinational banking and financial services company headquartered in London, is facing a shareholder revolt after financing carbon emitters which are incompatible with the Paris Climate Agreement.

Nobody would doubt that the challenges faced by global organisations are complex and diverse, and these have been well documented by media coverage, regulatory sanctions and in some cases even Netflix documentaries[2].

There is, however, one common theme that runs through all of these case studies: ineffective governance reporting, and in particular, the lack of, or poor choice of, good Management Information (MI).

It was poor quality Key Performance Indicators (KPIs) which resulted in Wells Fargo employees creating fee-generating accounts and products without the customers’ consent, as they fought to hit their ambitious cross-selling targets. For Rio Tinto, there were no KPIs regarding the local communities which they professed to champion in their annual report. In the case of Standard Chartered, it was financial decisions which some shareholders deemed went against their ESG commitments and its strapline “Here for Good”.

By committing to the highest standards of corporate governance reporting, and through paying close attention to the quality, choice and availability of supporting MI, organisations will be able to rely on effective controls to reduce the likelihood of similar events happening again.

What does good MI look like?

Good MI can be defined as the minimum number of metrics which provide an honest reflection of progress against an item of interest. The MI must provide insight into the key aspects of an item, not just ‘good news’ reporting, and show the long-term impacts of a decision. Crucially, MI needs to be used for all matters which are important to a company, rather than purely financial items. A qualitative analysis of items is key, as well as quantitative. For example, many companies state the headline importance of diversity and inclusion but often do not back this up with any targets or KPIs to improve diversity at board or executive committee levels. Whilst ‘operationalising’ a firm’s values can be hard to do, it is the most effective way of demonstrating integration of a firm’s values across its decision-making processes, as well as progress made over time. After all, what gets measured, gets managed.

So – having considered the case studies, as well as ‘what good looks like’ from an MI perspective, there are three key questions which organisations need to ask themselves to ensure robust and high-quality decision making:

1. What do we need to report on?

First, companies must identify what they need to report on. This should include culture, purpose, stakeholder interaction and engagement, wider community contribution and essentially any item which a firm publicly states a commitment to. Many organisations claim to have a purpose above and beyond financial gain, yet the vast majority of MI within corporate reporting is focussed on financial performance only. In the case of Rio Tinto, there were eight accountability KPIs in its annual report, of which six focused on its shareholders and profitability – leaving only two for other matters. One focussing on employee safety, and one on greenhouse gas emissions. This does not align closely to its commitment to its “employees, customers, suppliers, local communities and host governments”[3]. A similar trend is also evident across financial services, with only 23% of company’s linking stakeholder considerations to strategy and KPIs, and only 4% of FTSE 350 companies illustrating the long-term impact of board decisions in the context of stakeholder considerations[4]. Whilst internal KPIs may exist, companies must include these at the highest levels (including the annual report) to show true conviction behind its rhetoric. If it matters, companies must measure it.

2. Are the existing metrics appropriate?

Once firms have identified what they need to report on, they should then identify the right metrics to support effective decision making. These metrics are those that provide genuine insight into key items, reflect the long-term impact of a decision and do not conform to the common trend of “good news reporting”. Crucially, metrics can and should evolve over time. The right metrics may not always be the prettiest (all green RAG status anyone?) but provide the information and insight required to support robust governance and decision making. This will often require two or more metrics against the same issue. For example, if customer complaints are down, senior management may feel this is a success. However, if the result is that customers are simply leaving instead of complaining, then this is a different view of the metrics that needs further investigation. The same may apply to staff well-being and engagement, when viewed against staff attrition. If staff are simply leaving as opposed to making their concerns heard, there may be latent issues that an organisation needs to investigate more thoroughly.

3. Are these the minimum number of metrics required?

Many organisations suffer from meeting fatigue and information overload. Governance packs have grown exponentially over recent years as additional numbers and information have been added to packs on a ‘nice to have’ basis, rather than following a strategic direction. This has resulted in the dilution of key messages across a governance pack often several hundred pages long. It also has the potential to hide either deep-rooted or emerging issues amid the noise of the ‘green-washed’ status and the good news. Firms must challenge all meeting materials and MI to ensure supporting information is strategic and constructive to decision making, rather than allowing for all information to be included. Whilst meeting inputs and brevity need to be carefully balanced, often less is more, particularly when focussed on the most difficult conversations that senior management need to engage in.

Conclusion

In summary, the above three questions are not all-encompassing and are by no means a panacea for all governance and MI related challenges, however they do provide a logical starting point for an organisation to identify whether its governance and supporting MI enables effective decision making.

Once the answers to these fundamental questions have been developed, additional factors can then be considered to transform the supporting MI from ‘fit for purpose’ to ‘best-in-class’. For example, can the metrics be used consistently across several years to ensure progress can be tracked continuously? Do the metrics identified reflect the long-term impact of decision making?

The required analysis, design and transformation will undoubtedly take time, energy, and budget to implement, but in order to avoid the governance missteps such as those outlined in the cases of Wells Fargo, Rio Tinto and Standard Chartered, it is clear that this is not an area that organisations can afford to ignore any longer.

[1] https://www.latimes.com/business/la-fi-wells-fargo-settlement-20160907-snap-story.html

[2] Dirty Money, “The Wagon Wheel”, Season 2, episode 1.

[3] Put Your Metrics Where Your Mouth Is (hbr.org)

[4] FRC “Review of Corporate Governance Reporting” November 2020.