DataMNC Blog

DataMNCJanuary, 2024

Financial Statements and Sustainable Performance

Traditional measures of business performance emphasize shareholder and manager perspectives on short-term financial and capital markets results, sustained over time. Emerging perspectives on sustainable business performance emphasize longer-term financial and capital markets performance, plus newer measures of performance, for the benefit of shareholders, creditors, and other stakeholders.

Traditional measures of business performance of publicly-listed companies emphasize shareholder and executive management perspectives on short-term financial and capital markets results, sustained over time.    

Shareholders are generally considered the primary stakeholders in measuring business performance, as providers of equity capital "of-last-resort" to fund the business, and with expectations for return based on market risks and expectations of market rates of return.    In analyzing and predicting shareholders returns, investment advisors consider market contexts such as industry sectors and geographies before analyzing financial statement results and capital markets valuations.  Meanwhile, when considering shareholders, two types of agency issues can arise: (1) potential misalignment between shareholders and executive management, and (2) potential misalignment between different classes of majority and minority shareholders.   

Most often the starting point and most important measures of business performance for corporations are based on various components of financial statements, traditionally including a balance sheet, income statement, and cash flow statement.   Financial statements are often audited for conformity with national accounting standards, and the advent of International Financial Reporting Standards (IFRS) since 2010 have improved the consistency and comparability of financial statements worldwide.  Financial statements are generally issued in quarterly and annual forms, generating significant focus on quarterly results as trends and comparisons with prior periods.    

For publicly-listed companies, market capitalization, calculated based on the price per share multiplied by the number of shares outstanding, is also a highly monitored measure of business performance.   Capital markets trends can be monitored daily as well as with reference to quarterly and annual results.

Emerging perspectives on sustainable business performance emphasize longer-term financial and capital markets performance, plus newer measures of performance, for the benefit of shareholders, creditors, and other stakeholders.    For periodic perspectives, for example, short-term movements in quarterly and annual financial statement results and immediate capital markets valuations, can be compared with more medium and long-term results and industry benchmarks.   Beyond traditional measures of financial statement performance, other measures of value-added economics and accounting have developed.   Economic value added (EVA) is a microeconomic model that measures value added directly and indirectly and predicts distributions of value to creditors and shareholders based on market risks and expected market rates of return.   Some national financial statement requirements include a statement of value-added with consistent reporting of value added, distributions to creditors, distributions to shareholders, and distributions of compensation to employees. 

While there are ample reasons to consider shareholders as the primary stakeholders of corporations, other stakeholders also are interested in definitions and measures of business performance.   For example, secondarily, creditors are considered important stakeholders because they provide debt capitalization to corporations with terms for repayment (or conversion to equity) plus returns based on market risks and expectations of market rates of return.  Another stakeholder group that receives distributions of value generated by businesses are the employees, including executives.   Another obvious stakeholder group is customers.   And further stakeholder groups might include communities where a business operates, and public officials with responsibility for regulation of the industry and business.

In recent decades, in an effort to attract investors and other stakeholders, many publicly-traded companies voluntarily have provided additional disclosures along with annual financial statements.   Over time annual corporate reports have taken various forms of management reports, traditional annual reports, corporate social responsibility (CSR) or sustainability reports, and integrated annual reports.    Historically, annual corporate reporting standards have varied according to disparate standard setters, and thus information data provided in annual corporate reports is generally neither presented in consistent and comparable forms nor audited similar to financial statements.      In addition, some countries now require publicly-listed companies to file a further specific form of national annual corporate reports.   Thus, the initiatives and data disclosed in annual corporate reports are “interesting” and “have potential”, but their lack of consistency and comparability means that they remain less useful than financial statements for shareholders and other stakeholders to define and measure sustainable business performance.  This muddled result obtains whether undertaken by institutional investors seeking to attract more clients to invest based on Environmental, Social, and Governance (ESG) analyses or by advocates of corporate social responsibility (CSR).    Increasing IFRS sponsorship of corporate reporting standards with the International Sustainability Standards Board (ISSB) will help improve corporate reporting consistency and comparability, although progress is likely to be slow.

With the growth in stakeholder perspectives and financial and other information reported by publicly-listed corporations, defining and measuring sustainable business performance takes on increasing importance and continues to evolve slowly and dynamically.   It remains necessary to balance and compare the competing interests of different stakeholders, and also to carefully assess the consistency and comparability of data disclosed by publicly-traded companies.

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