This article appeared previously in the Association of Corporate Counsel’s ACC Docket and is published here with permission from the journal.
According to the World Health Organization (WHO), since 1990, cardiovascular disease (CVD) has killed more people than any other cause. The WHO also reports that 80 to 90 percent of people dying from CVD have one or more risk factors that are driven by lifestyle; chief among these are smoking, exercise and diet. Despite the fact that such risk factors are widely known, relatively few of us are disciplined enough to exercise regularly, sustain a well-balanced diet and avoid bad habits like smoking.
There are, of course, many explanations for our collective failure to adopt healthier lifestyles. These include busy schedules, the difficulties of breaking the nicotine addiction, and the undeniably great taste of saturated fat and processed sugar. Also, despite its obvious benefits, the workout thing is far more painful than sitting on the sofa and watching TV.
Another possible explanation for our unhealthy behaviors is that the cumulative impacts of our bad habits take years to manifest themselves. As bad as junk food may be for our long-term health, the occasional deep-fried Twinkie is not going to kill us and does provide vital life-sustaining calories and nutrients. Evolutionary scientists have observed that one reason fat- and sugar-laden foods are so satisfying is that such dietary preferences are imbedded in our genes as a survival mechanism that developed during the millennia our species lived as subsistence-level hunter-gatherers. So, for these and other reasons, many of us reach for the burger and fries rather than the more healthful beans and brown rice, even though we know that doing so clogs our arteries and is likely to lead to CVD or some other health malady. Sometimes I wonder whether corporations suffer from a similar affliction.
Short-term financial metrics provide vital information regarding business performance, but many have observed that an over-reliance on such metrics, to the exclusion of others, can be harmful to long-term corporate health; it is the “fast food” of corporate management. Like fast food, financial metrics are relatively easy to get and provide essential “nutrients” vital to understanding business performance. But such metrics have two significant weaknesses: they are backward-looking and exert a constant pressure on management to sacrifice long-term organizational health to make the numbers look good today.
Time and again, we read about corporations suffering from significant “health” problems whose origins can be traced back to short-sighted strategies that reduced safety margins, under-invested in environmental, financial or quality controls and – perhaps worst of all – lost sight of the fact that employees are flesh-and-blood human beings rather than numbers on a spreadsheet. The resulting corporate maladies include financial scandals, product recalls, environmental or safety catastrophes and diminishing performance due to poor employee morale. I don’t mean to suggest that over-reliance on financial metrics is the cause of every corporate failure. Just as any of us could get run over by a bus or suffer some other health problem unrelated to our diet and lifestyle, corporate performance can be adversely affected by many other factors, such as unexpected changes in government regulations, earthquakes and economic recessions. But, just as we can greatly reduce our risks of suffering from CVD by making dietary changes, we can avoid the chronic corporate ailments that arise from our addiction to financial metrics by consuming and acting on a more wholesome set of performance metrics.
Although there is no widespread consensus on what constitutes a healthier corporate metrics “diet,” there are many varieties of fairly well-developed options to choose from. For example, there is the “balanced scorecard” advocated by Robert Kaplan and David Norton in their numerous publications on the subject. In addition, for many years now, social responsibility advocates continue to press corporations to pursue the “triple bottom line” — comprising people, planet and profit. However, I am not advocating any particular form of balanced scorecard.
Instead, I’m suggesting that given the widely acknowledged dangers of an addiction to short-term financials, our legal and ethical duties of care and loyalty compel us to seriously examine the way we measure success and ask whether it is helping or hurting our organizations over the long term. In so doing, we should ask ourselves what might be done to induce a healthier corporate lifestyle. Regardless of what non-financial metrics you ultimately take into account, I don’t think we are likely to achieve meaningful behavioral changes unless non-financial performance metrics are tied directly to variable compensation.
The many arguments you might hear against adopting a balanced scorecard are quite similar to the excuses we often give for our unhealthful lifestyles. Some will maintain that the company is too busy to invest in such systems and processes. Short-term boosts in financial performance “taste” great; they make investors cheer and are easily translated into employee bonuses. And, of course, many will point out that understanding short-term financial metrics contributes to corporate survival, because there is no long term unless the company stays afloat in the short term. But, like the would-be jogger who says “maybe tomorrow” whenever he sees his pair of unused running shoes, these are merely rationalizations that evidence a lack of will to pursue a healthier and more sustainable form of corporate governance.
Like engaging in regular exercise and eating a balanced diet, kicking our addiction to short-term financial metrics will likely require significant self-discipline and a sustained effort. However, such an investment may be well worth it if it succeeds in keeping your corporation’s heart pumping strong and arteries clear for many years to come.