For many companies, book value reflects only a fraction of their true worth. A substantial portion of their value is found in intangibles, such as market penetration, brand recognition, intellectual property, and management. It’s critical to assess and value these abstract items that ultimately have a significant impact on long-term success and future earnings growth. And many companies are now looking at these intangibles –– items that don’t appear on traditional financial statements –– as a way to judge performance.

Multiple measures of success, which focus on earnings as well as customer and employee satisfaction, can help a business find new ways to create long-term value. Some companies are using customer satisfaction, employee satisfaction, and financial performance –– each weighted equally –– to design long-term compensation packages for senior executives. The theory is that happy employees help create satisfied customers, who in turn pay for products and services that produce growth.

Benchmarking and the Balanced Scorecard
How do you develop models to track and quantify hard-to-define areas like customer satisfaction? One way is through benchmarking and the development of a balanced scorecard.

Benchmarking is the process of comparing your company to others to evaluate productivity and, more important, to identify ways to improve performance. Overall corporate benchmarking, which looks at business performance and return on investment, can help you determine if you need to improve. But don’t neglect process benchmarking, which evaluates your strengths and weaknesses and identifies specific areas that need improvement.

A balanced scorecard is a reporting tool that can facilitate the benchmarking process and help you value and quantify intangibles. It should address "soft" issues, such as:

• What is the value of your company’s reputation?
  
• What is the value of your customer base or distribution system?
  
• What is the value of your employee knowledge base?
  
• What are company innovations likely to produce?

Economic Statements vs. Financial Statements
A balanced scorecard considers both financial and nonfinancial measures. It accounts for traditional financial data –– e.g., total return, inventory turns, margins –– as well as soft items, such as market share, employee and customer satisfaction, reputation, and relative quality.

By accounting for these factors in a balanced scorecard, you can develop more complete "economic statements." Economic statements provide wider coverage than traditional financial statements. They paint a more accurate picture of how your company is performing and is likely to perform in the future.

Traditional financial statements, without more, can provide incomplete information and encourage short-term "band-aids" at the expense of investment in long-term value-creating strategies.

By recognizing and weighing the intangibles quantified by the balanced scorecard, you take into account your company’s most important, but often overlooked, assets. And when used to develop compensation packages for senior management, balanced scorecards encourage not only innovation and "out-of-box" thinking, they also help align the interests of all company stakeholders –– employees, management, and shareholders.