A Brief Look At Corporate Performance Analysis

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Historically, corporate performance analysis has focused on a company’s financial performance - commonly known as “lagging” indicators. This “rear-view mirror” method of analysis depends on accurate financial statements - yet more than 20% of CFOs say they feel more pressure to practice aggressive accounting than they did before Enron.Despite heavy criminal penalties allowed under Sarbanes-Oxley- 56% of CFOs report intentional misstatement of financials are still possible. More than two years after the passage of Sarbanes-Oxley, more than 1,300 people every day blew the whistle to the SEC to report financial and securities fraud-30% of which led to enforcement actions. As financial restatements continue to rise, investors now realize “lagging” indicators alone are insufficient to measure corporate performance. With financial statements in question and 70% of the value of the S&P 500 now found in “intangible” assets (up from 20% in 1980), we are looking to “leading” indicators to perfect the science of corporate performance analysis which the media now reports “evidence is just too powerful not to be embraced by mainstream investors”.

Although the importance of “leading” indicators are recognized, no comprehensive holistic solution exists today, leaving investors and analysts placing pressure on companies to solve the problem. Although 75% of board directors feel pressure to measure “non-financial” performance or “leading” indicators, 67% report they are unsure how to.

Sarbanes-Oxley (SOX) was expected to “solve the problem”, by creating greater transparency to mitigate risk; however, it has only proven burdensome and costly.

Front-end costs of SOX are estimated as high as $20 billion, with $5 to $10 billion in annual follow-on costs. Companies are now rethinking remaining public-causing the SEC and the US exchanges to seek solutions, or as noted by the CEO of the NASDAQ - 90% of foreign entrepreneurs choose to list their companies on foreign stock exchanges.

Incorporating both “leading” indicators and “lagging” indicators creates the first holistic view of an organization’s structural integrity; providing greater transparency, reduced cost of compliance, greater shareholder value and competitive advantage.

The Importance of Structural Integrity - Bear Sterns

Like buildings—companies need structural integrity. As we have seen, even the tallest buildings and biggest companies can fall virtually without warning.
As Wall Street remains focused on financial statements as the key indicator of future performance, The Integrity Institute® is focused on the foundation of the organization and the early warning signs to predict how companies […]