A.

EFFORT TO REMEDY THE MYOPIA :

1. Reducing the pressure for short-term profit
2. Using preaction reviews (action controls) to control developmental, long-term
invesments
3. Lengthening the horizon over which performance is measured and rewarded ( using
long-term incentives )
4. Changing what is measured ( other proxies for shareholder value creation instead of
accounting income )
5. Adjusting or improving accounting measures to better reflect economic income
6. Replacing (or complementing ) accounting measures with (nonfinancial ) value
drivers of performance ( that is, using combination of measures systems )

B. HOW DOES IT WORK ? PRINCIPLES :

1. Reducing the pressure for short-term profit = The reductions in pressure can be
affected in either of two basic ways, the weighting placed on the annual (or quarterly)
profit targets can be reduced, perhaps even to zero, while other, longer term
performance indicators, such as market share or technical breakthroughts, are
emphasized. The short term profit targets can be made easier to achieve.
2. Using preaction reviews (action controls) to control developmental, long-term
invesments = The key to implementing this approach is to distinguish between
operating expenses, which are necessary to produce current-period revenues, and
developmental expenses, which are incurred in order to generate revenues in future
periods. If this distinction can be made, the profit center managers are asked to
maximize operating income – that is, they are asked to focus on current period sales
and costs – which are good indicators of short-term performance.
3. Lengthening the horizon over which performance is measured and rewarded (
using long-term incentives = One way to enhance congruence is by providing
incentives tied to performance measured over longer periods; that is, by providing
long-term incentives.
4. Changing what is measured ( other proxies for shareholder value creation instead
of accounting income ) = This direct measurement of the value of an entity can be
 made both at the beginning and the end of a measurement period. The difference
between the beginning and ending values is a direct estimate of the value created
during the period, and thus of economic income. The idea of measuring economic
income directly and then using it in a financial results control system to motivate
managers’ behaviors is fraught with difficulties, however. Hence, this remedy to
myopia suffers from feasibility. Will the cash flow forecasts prove to be accurate?
Who should prepare the forecasts? Certainly some measurement difficulties need to
be faced, but some believe that measuring changes in economic income directly
might be workable within usable levels of accuracy in some situations (although
likely rather infrequently).
5. Adjusting or improving accounting measures to better reflect economic income = A
fifth approach to mitigate investment myopia involves changing the measurement
rules to make the accounting income measures better; that is, more congruent with
economic income. These improvements address one or more of the deviations
between accounting income and economic income.
6. Replacing (or complementing ) accounting measures with (nonfinancial ) value
drivers of performance ( that is, using combination of measures systems ) = The
short-term, backward-looking, transactions-based orientation of accounting measures
can be balanced by focusing also on other performance measures that are more
future-oriented. For example, well-chosen nonfinancial measures can provide signals
about what is likely in the future. Accomplishments in areas such as R&D, new
product development, product quality, and customer satisfaction are often value
drivers and hence, leading indicators of future financial performance. carefully
selected value drivers are leading indicators of forthcoming cash flows and profits,
value drivers focus managers’ attention on actions and decisions they should worry
about today in order to create (or not destroy) value in the reasonably distant future.

C. HOW IS THE IMPLEMENTATION ?

1. Reducing the pressure for short-term profit :
 Weightings placed on annual or quarterly targets can be reduced even to
zero : PT. X in 2016 had relatively small profits due to investment activities
 such as purchasing new machines, opening new plants and launching new
products. PT.X's small profit does not indicate that PT.X has a poor financial
performance because on the other hand PT. X has a large share, then has good
product quality and high customer satisfaction. So that does not indicate that
the financial performance is bad because there are still other things that will
increase profits in the future.
 Put more emphasis on long-term indicators, such as market share or
technical breakthroughs : Such as market share, customer satisfaction,
research & development and others.
2. Using preaction reviews (action controls) to control developmental, long-term
invesments :
 Standard Profit / Loss Report :
Revenue $100
Expense $ 90
Net profit $ 10
 Earnings Report with Performance :
Revenue $ 100
Operating costs $ 50
Operating margin $ 50
Development Investment $ 40
Net profit $ 10
3. Lengthening the horizon over which performance is measured and rewarded ( using
long-term incentives ) :
 General Electric Company Long Therm performance Awards (LTPA):
This LTPA was approved in 2006 and an Award was made in 2009, with 600
executive candidates selected based on 2006-2008 performance. Awards are
based on four performance measurements based on :
a) Average income per share growth rate
b) Average rate of income growth
c) Total capital cumulative returns
d) Cumulative cash flow from operating activities
 The type of incentive is retirement, how does retirement affect income?
Simulated with calculations:
 As measured regarding the effect of retirement on income, the
measurements are:
a) Threshold Payment
b) Target Payments
c) Maximum Payment
4. Changing what is measured ( other proxies for shareholder value creation instead of
accounting income ) :
 If rewards are linked to cash flow estimates, managers might be tempted to
make biased estimates. This deviation may be controlled by having an
estimated preparation or at least an assessment conducted by an independent
third party, such as a consulting or auditor company.
5. Adjusting or improving accounting measures to better reflect economic income :
in mark to market accounting (calculation of actual market value) in some industries
(for example banks), when certain assets in the statement of financial position hold
market values rather than their cost history, so that profits and losses are recorded
when there is a change in the observed value and not only when assets will be sold.
The next example is when an oil company can immediately reward exploration
experts, geologists and geophysicists after they have succeeded in creating value for
the company (when oil or gas was discovered). In this case, the reward or bonus will
be based on an estimate of the value of their findings
6. Replacing (or complementing ) accounting measures with (nonfinancial ) value
drivers of performance ( that is, using combination of measures systems ) :
 General Electric (GE)
In the 1990s a multi-product and service company from the United States,
General Electric decentralized the organization to more than one hundred
profit centers. Managers develop measurement systems that consist of eight
main measurements: a. Short-term Profit
b. Market Share
c. Productivity
 d. Product Leadership
e. Employee Attitude
f. Personnel Development
g. Public Responsibility
h. The balance between short-term and long-term goals The eight things above
are not just a measurement system, but rather as a reminder that short-term
and long-term balance is very necessary.

D. LIMINATION CHALLENGE / ISSUE HAS TO BE ADDRESED :

1. Reducing the pressure for short-term profit :
 The risk to doing this is to reduce the long-term profit pressures that trigger
the slowness of a loss from short-term concentration without the need to
sharpen the long-term focus. Therefore, when short-term pressure is reduced,
managers who apply pressure must be trusted or vice versa, pressure must be
applied in other ways, such as evaluating non-financial performance.
2. Using preaction reviews (action controls) to control developmental, long-term
invesments :
 The key to applying this approach is to distinguish between operating costs
needed to generate current period income and development costs incurred
with the aim of generating revenue in the future period.
3. Lengthening the horizon over which performance is measured and rewarded ( using
long-term incentives ) :
 The mental discount rate employees apply to delayed rewards isgreater than
the time value of money. Hence, extending the time horizon of incentives has
a cost interms of providing higher payoffs in expectation.Another riskcan be
found in the performance standard. Firms commonly use the numbers
includedin the long-term strategic plan as the standard. But this can drive
much of the creative thinkingout ofstrategic planning.
4. Changing what is measured ( other proxies for shareholder value creation instead of
accounting income ) :
  Most companies do have considerable experiencein preparing and analyzing
estimates of future cash flows, and therefore should not be a problem.Riskin
this approach is measurement precision and objectivity. Managers may be
tempted to biastheir estimates if the rewards are linked to the cash flow
estimates.
5. Adjusting or improving accounting measures to better reflect economic income :
 most of the improvements in measurement deviate from applicable accounting
rules. Therefore, their implementation will cause the performance reports used
for management control purposes to differ from the financial statements
prepared. And this improvement requires the use of third financial records that
are determined by management to complete records designed for financial
statements and tax purposes.
6. Replacing (or complementing ) accounting measures with (nonfinancial ) value
drivers of performance ( that is, using combination of measures systems ) :
 If the company has determined which are the main indicators and which
indicators are supporting, then profit will definitely follow. Therefore
managers must carefully consider which key indicators will be used or used.
Some managers do not fully understand what should be done to increase the
value of the entity. With this combination of measurement systems, managers
get more guidance on how to create value compared to using a system based
on a summary of performance measurements, both market and accounting
naturally.