The Hindu Business Line : When measures added to confusion

Ralph Cordiner served as GE’s president from 1950 to 1958, and as chairman from 1958 to 1963. Cordiner wanted his managers to address more than just the financials such as ROI (return on investment) and cash flow. Traditional profit measures are hopelessly inadequate as measures to guide the manager’s effectiveness in planning for the future of the business, he wrote in a book on business measures.

“He established a ‘Measurement Service,’ described as a ‘permanent organisation component in Accounting Services.’ This organisation was charged with establishing the specific criteria to be used, communicating them to operations, and then periodically checking to see if the measures were being met,” narrates William E. Rothschild in The Secret to GE’s Success ( www.tatamcgrawhill.com ).

Some of the parameters in the Cordiner gospel were not easy to measure, the author informs. “For instance, market share must be defined in the context of a served market. Very often, the definition of the ‘served market’ was gerrymandered to make the performance of the general manager and the department look better than it really was.”

Other measures, such as employee attitudes and public responsibility, were never clear and therefore only added to the confusion, Rothschild reminisces. “In reality, the only measure that was used was profitability. The system looked good on paper but wasn’t very helpful. Unfortunately, these measures continued to be used and became part of the GE psyche.”

Filled with insights of value to the management and accounting professionals.

ERM expectations

Increasing stakeholder scrutiny has been a key driver for the recent development of ERM (enterprise risk management) and is set to raise the bar further in the coming years, says PricewaterhouseCoopers in Does ERM matter? ( www.pwc.com ). “Analysts and investors are demanding more information about risk management and capital positions,” adds PwC’s global study of ERM in the insurance industry. “Market professionals are particularly keen to learn more about companies’ risk appetite and the sensitivity of risk positions to market movements and emerging risks.”

The recent turmoil and asset write-downs in the credit markets and the ensuing liquidity crisis have highlighted the increasing complexity, volatility and uncertainty of a constantly evolving risk environment, the report’s authors note. “As many banks had invested considerable sums in developing their ERM capabilities over several years, the failure of some programs to prevent these losses has heightened some observers’ scepticism about the usefulness of ERM…”

Recommended read for those in the risk business.

D. MURALI

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