CORPORATE PERFORMANCE:

DEFINING AND MEASURING PERFORMANCE

SUBMITTED TO: SUBMITTED BY:

Dr. Suveera Gill Arushi Gupta (4)
Fiza Bhateja (8)
Professor
Neelam Chauhan (14)
University Business School Prerna Arora (19)
Panjab University Priyanka Chauhan (20)
Chandigarh Radhika Goel (21)
M.Com (hons) 4th Semester
HOW SHOULD BOARDS AND OTHER
EVALUATE CORPORATE PERFORMANCE---
OVER WHAT TIME PERIOD, FOR WHOM,
FOR WHOSE PERSPECTIVE, AND BY WHAT
MEASURES??
Contents

• Introduction
• Corporate performance measurement and
Performance measures
• Economic value added(EVA)
• Market value added (MVA)
• Return on equity (ROE)
• Return on assets (ROA)
 INTRODUCTION
• Revolutions begin long before they are officially declared. For several
years, senior executives in a broad range of industries have been
rethinking how to measure the performance of their
businesses they have recognized that new strategies and competitive
realities demand new measurement systems. Now they are deeply
engaged in defining and developing those systems for their companies.
• At the heart of this revolution lies a radical decision: to shift from
treating financial figures as the foundation for performance
measurement to treating them as one among a broader set of measures.
Put like this, it hardly sounds revolutionary. Many managers can
honestly claim that they- and their companies- have tracked quality,
market share, and other non financial measures for years. Tracking these
measures is one thing. But giving them equal status is determining
strategy, promotions, bonuses, rewards .until that happens, to quote
RAY STATA, the CEO of analog devises, “when conflicts arise, financial
considerations win out.”
Source: Harvard business review: performance management manifesto
INTRODUCTION(2)
• Senior manager at one large, high tech manufacturer recently took
direct responsibility for adding customer satisfaction, quality, market share
and human resource to their formal measurement system. This impetus was
their realization that the company’s existing system, which focused on
customer service. At a small manufacturer, the catalyst was leveraged
capitalization that gave CEO the opportunity to reorder the company’s
priorities. On the new list EPS dropped up to last place, preceded by
customer satisfaction, cash flow, manufacturing ineffectiveness and
innovation. On the old list, EPS stood first and almost done.
• What gets measured gets attention, particularly when rewards are tied up to
measures? Grafting new measures onto old accounting driven performance
or making slight adjustments in existing incentives accomplishes little.
enhanced competitiveness depends on starting from scratch and asking.”
given our strategy, what are the most important measures of
performance?” how do these measures relate to one another?”
what measures truly; Predict long term financial success in our
businesses?” Source: Harvard business review: performance management manifesto
CORPORATE PERFORMANCE MEASUREMENT

• Performance measures are a metrics along which organizations

can be gauged. Most executives, investor and stakeholders
watch and examine measures such as profits, stock price,
and sales in an attempt to better understand how well their
organizations are competing in the market, as well as future
predicted results. But these measures provide just a
glimpse of organizational performance.
• These indicators show stakeholders the end-results of past
decisions, but do little to predict future firm performance.
CORPORATE PERFORMANCE MEASUREMENT (2)
The parable of the blind men and the elephant—popularized in Western cultures
through a poem by John Godfrey Saxe in the 19th century—is useful for
understanding the complexity associated with measuring organizational
performance. As the story goes, six blind men set out to “see” what an elephant
was like.
• The first man touched the elephant’s side and believed the beast to be like a great
wall.
• The second felt the tusks and thought elephants must be like spears.
• Feeling the trunk, the third man thought it was a type of snake.
• Feeling a limb, the fourth man thought it was like a tree trunk.
• The fifth, examining an ear, thought it was like a fan.
• The sixth, touching the tail, thought it was like a rope.
If the men failed to communicate their different impressions they would have all been
partially right, but wrong about what ultimately mattered.
CORPORATE PERFORMANCE (3)
PERFORMANCE MEASURES
PERFORMANCE MEASURES (2)
• These performance measures can be classified as
Financial & Non financial.
• FINANCIAL MEASURES ARE:

Financial measures

EVA MVA ROE ROA

FINANCIAL MEASURES
Financial measures of performance relate to organizational
effectiveness and profits. Examples include financial
ratios such as return on assets, return on equity, and
return on investment. Other common financial measures
include profits and stock price. Such measures help
answer the key question “How do we look to
shareholders?” Such measures have long been of
interest
ECONOMIC VALUE ADDED (EVA)
• Alfred Marshall (1890) pioneered the notion of economic profit, expressed in terms
of real profits besides various operating cost and cost of invested capital. Later in
1991, New York based management consultancy firm Stern Stewart and Co. coined
and popularized the concept of EVA. They contend that a trademarked variant of
residual income, EVA, be used instead of earnings or cash from operations as a
measure of both internal and external performance.
• Economic value added (EVA) is a measure of a company's financial
performance based on the residual wealth calculated by deducting its
cost of capital from its operating profit, adjusted for taxes on a cash
basis. EVA can also be referred to as economic profit, as it attempts to capture the
true economic profit of a company.
• EVA is the incremental difference in the rate of return over a company's
cost of capital. Essentially, it is used to measure the value a company generates
from funds invested into it. If a company's EVA is negative, it means the company is
not generating value from the funds invested into the business. Conversely, a
positive EVA shows a company is producing value from the funds invested in it.
• The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT)
- Invested Capital * Weighted Average Cost of Capital (WACC)
ECONOMIC VALUE ADDED(EVA)(2)
Companies that adopted EVA:
• Several United States listed companies like AT and T, Coca Cola,
Eli Lilly, Georgia Pacific, Polaroid, Quaker Oats, Sprint,
Teledyne and Tenneco have adopted EVA as a performance
measurement.
• Indian companies like Tata Consultancy Services, Infosys
Technologies Ltd., Hindustan Unilever Ltd., Dr. Reddy’s
Laboratories Ltd., Godrej Industries Ltd., and Hero Honda
Motors Ltd. extensively base their decisions using the value
added measure.
Anecdotal evidence quote EVA as “today’s hottest financial idea”, “the
real key to wealth creation” and “A new way to find bargains”. EVA’s
growing popularity reflects, amongst other things the demand of the
information age for a measure of the total factor productivity (Drucker,
1995).
MARKET VALUE ADDED(MVA)
• The primary goal of most firms is to maximize shareholders’ wealth. This
goal benefits shareholders, but it also helps to ensure that scarce resources are
allocated efficiently, which benefits the economy. Shareholder wealth is
maximized by maximizing the difference between the market value of
firm’s stock and the amount of equity capital that was supplied by
shareholders. This difference is called the Market Value Added (MVA)
• MVA = Market value of stock – Equity shareholder capital

= (Shares outstanding) × (Stock price) – Total common

equity.
• The higher its MVA the better the job management is doing for the
firm’s shareholders.
• Sometimes MVA is defined as the total market value of the company minus
the total amount of investor-supplied capital, Wet (2005):
MVA = Total market value – Total capital = (Market value of stock +
Book value of debt) – Total Capital.
MARKET VALUE ADDED(MVA)(2)
• For most companies, the total amount of investor supplied
capital is the sum of equity, debt and preferred stock. We
can calculate the total amount of investor-supplied capital
directly from their reported values in the financial
statements.
• The total market value of a company is the sum of the
market values of common equity, debt and
preferred stock. It is easy to find the market value of
equity since stock prices are readily available.
• Still, it is not always easy to find the market value of debt.
Hence, many analysts use the value of debt that is reported
in the financial statements or the debt’s book value as an
estimate of its market value.
RETURN ON EQUITY(ROE)
• Return on equity (ROE) is a measure of financial performance
calculated by dividing net income by shareholders' equity.
Because shareholders' equity is equal to a company’s assets minus its
debt, ROE could be thought of as the return on net assets.
• ROE is considered a measure of how effectively management is
using a company’s assets to create profits.
• ROE is expressed as a percentage and can be calculated for any
company if net income and equity are both positive numbers. Net
income is calculated before dividends paid to common shareholders
and after dividends to preferred shareholders and interest to lenders.

Return on Equity=Average Shareholders’ Equity/
Net Income​​
RETURN ON EQUITY(ROE)(2)
Consider Apple Inc. (AAPL)—for the fiscal year ending Sept.
29, 2018, the company generated US$59.5 billion in net come.
At the end of the fiscal year, it’s shareholders’ equity was $107.1
billion versus $134 billion at the beginning.
Apple’s return on equity, therefore, is 49.4%
or $59.5 billion / (($107.1 billion + $134 billion) / 2).
Compared to its peers, Apple has a very strong ROE.
• Amazon.com Inc. (AMZN) has a return on equity of 27%
• Microsoft Corp. (MSFT) 23%
• Google—now know as Alphabet Inc. (GOOGL) 12%
RETURN ON ASSETS(ROA)
• Return on assets (ROA) is an indicator of how profitable a
company is relative to its total assets. ROA gives a
manager, investor, or analyst an idea as to how efficient a
company's management is at using its assets to generate
earnings. Return on assets is displayed as a percentage.
• This ratio indicates how well a company is performing by
comparing the profit (net income) it’s generating to the capital
it’s invested in assets.  
• The higher the return, the more productive and
efficient management is in utilizing economic
resources. Below you will find a breakdown of the ROA
formula and calculation.
RETURN ON ASSETS(ROA)(2)
• The simplest way to determine
ROA is to take net income reported
for a period and divide that by
total assets. To get total assets,
calculate the average of the
beginning and ending asset values
for the same time period.

ROA = Net Income/Total Assets

• Some analysts take earnings before
interest and taxation, and divide
over total assets:

ROA = EBIT/Total Assets

• Accounting firms also have an opportunity to develop
measurements methods that will be common to and
industry or across industries. One reason why
financial measures carry such weight is that they are
assumed to be a uniform metric, comparable across
divisions and companies and thus are a valid basis for
resource allocation decisions. Second is investors are
showing more interest in metrics such as market
share, cash flow, return on assets and equity, many
managers and analysts identify the investment
community as the chief impediment to revolution.
NON-FINANCIAL
MEASURES
Johnson and Kaplan :

“More important than attempting to measure

monthly or quarterly profits is measuring and
reporting a variety of non-financial indicators. The
indicators should be based on the company’s strategy
and include key measures of manufacturing,
marketing and R&D systems. For example, a company
emphasising quality could measure internal failure
indicators – scrap, network, part-per- million defect
rates, unscheduled machine down-time and external
failure indicators – customer complaints, warranty
expenses and service calls. Rather than attempting to
extract such informa­tion from a system designed
primarily to satisfy external reporting and auditing
requirements, we should design systems consistent
with the technology of the organisation, its product
strategy and its organisation structure.”
Non-financial measures offer four clear advantages
over measurement systems based on financial data :

• First of these is a closer link to long-term organizational

strategies. Financial evaluation systems generally focus
on annual or short-term performance against accounting
yardsticks. They do not deal with progress relative to
customer requirements or competitors, nor other non-
financial objectivAes that may be important in achieving
profitability, competitive strength and longer-term
strategic goals.
• For example, new product development or expanding
organizational capabilities may be important strategic
goals, but may hinder short-term accounting
performance.
2. Second, critics of traditional measures argue that
drivers of success in many industries are “intangible
assets” such as intellectual capital and customer
loyalty, rather than the “hard assets” allowed on to
balance sheets. Although it is difficult to quantify
intangible assets in financial terms, non-financial
data can provide indirect, quantitative indicators of a
firm’s intangible assets.
• One study examined the ability of non-financial
indicators of “intangible assets” to explain
differences in US companies’ stock market values.
3. Third, non-financial measures can be better
indicators of future financial performance.
•Even when the ultimate goal is maximizing financial
performance, current financial measures may not
capture long-term benefits from decisions made now.
•For example, investments in research and
development or customer satisfaction programs.
Under U.S. accounting rules, research and
development expenditures and marketing costs must
be charged for in the period they are incurred, so
reducing profits. But successful research improves
future profits if it can be brought to market.
4. Finally, the choice of measures should be based
on providing information about managerial actions
and the level of “noise” in the measures.
•Managers must be aware of how much success is
due to their actions or they will not have the signals
they need to maximize their effect on performance.
•Because many non-financial measures are less
susceptible to external noise than accounting
measures, their use may improve managers’
performance by providing more precise evaluation
of their actions.
•This also lowers the risk imposed on managers
when determining pay.
BALANCE SCORECARD
• The balanced scorecard is a balanced set of
measures that organizations use to motivate
employees and evaluate performance. These
measures are typically separated into four
perspectives outlined in the following. (Dr.
Robert S. Kaplan and Dr. David P. Norton
created the balanced scorecard, and it is actively
promoted through their company, Balanced
Scorecard Collaborative.)
 Balance score card measure
Internal
Learning and
Financial Business Customer
Growth
Process
Customer
Hours of employee
Gross margin ratio Defect-free rate satisfaction
training
(survey)
Employee Number of
Customer response
Return on assets satisfaction customer
time
(survey) complaints
Receivables
Capacity utilization Employee turnover Market share
turnover
Number of
New product Number of
Inventory turnover employee
development time returned products
accidents

SOURCE: https
://saylordotorg.github.io/text_managerial-accounting/s17-05-nonfinancial-pe
Example of Rockwater

• Rockwater, an underwater engineering and

construction firm, crafted a five- pronged
strategy: to provide services that surpassed
customers’ expectations and needs; to achieve
high level of customer satisfaction; to make
continuous improvement in safety, equipment
reliability, responsiveness and cost effectiveness;
to recruit and retain high quality employees; and
realize shareholders’ expectations
Using balance scorecard, Rockwater’s senior management
translated this strategy into tangible goals and actions:
• The financial measures they chose included return-on-
capital employed and cash flow, because shareholder’s
had indicated a preference for short term results.
• Customer measures focused on those clients most
interested in a high value-added relationship.
• The company introduced new benchmarks that
emphasized the integration of key internal processes. It
also added a safety index as a means of controlling
indirect costs associated with accidents.
• Learning and growth targets emphasized the percentage
of revenue coming from new services and the rate of
improvement of safety and rework measures.
 The Triple Bottom Line

• Ralph Waldo Emerson once noted, “Doing well is the result

of doing good. That’s what capitalism is all about.” While the
balanced scorecard provides a popular framework to help
executives understand an organization’s performance, other
frameworks highlight areas such as social responsibility.
• One such framework, the triple bottom line, emphasizes
the three Ps :
• of people (making sure that the actions of the organization
are socially responsible),
• the planet(making sure organizations act in a way that
promotes environmental sustainability), and
• traditional organization profits.
Case of Starbucks

The firm has made clear the importance it attaches to the

planet by creating an environmental mission statement

“Starbucks is committed to a role of environmental

leadership in all facets of our business”

In terms of the “people” dimension of the triple bottom

line, Starbucks strives to purchase coffee beans harvested
by farmers who work under humane conditions and are
paid reasonable wages. The firm works to be profitable as
well, of course.
Performance Prism
• The Performance Prism (PP) is referred to by its
Cranfield University developers as a ‘second
generation’ scorecard and management framework.
The distinguishing characteristic of the Performance
Prism is that it uses as its starting point all of an
organisation’s stakeholders, including investors,
customers and intermediaries, employees, suppliers,
regulators and communities, rather than strategy.
According to PP proponents, strategy should follow
from stakeholder analysis. The PP framework also
focuses on the reciprocal relationship between the
organisation and its stakeholders, as opposed to just
stakeholder needs.
The Performance Prism

Source: Cranfield School of Management

FOR WHOM?

• Providers of capital, the prototypical users, seek performance

information so that they can compare across opportunities to
identify the best use of their capital and ensure effective on going
stewardship of their investments.
• Other users may have different purposes – for example, a
lender wanting to ensure timely payment of interest and
principal, or a corporate centre allocating resources to various
divisions.
• The board itself needs this information to assess the success of
corporate strategy or to decide on executive compensation.
• Still others, such as a potential customer or employee, or a
local community deciding whether to grant a zoning variance will
likely have yet other needs.
OVER WHAT TIME PERIOD?

• In most jurisdictions, listed companies are legally

required to report their financial performance annually,
and in many cases quarterly or at least half-yearly. But
other users, such as boards of directors, have the option
of measuring (and compensating) performance over
longer horizons.
• Recognizing that no single metric (whether based on
stock price or summary accounting metrics) or time
horizon, is sufficient to capture the richness of business
outcomes, some companies have adopted a dashboard
approach based on ideas such as the balanced score card.
References-
RESEARCH PAPERS
• Petravičius, T., & Tamošiuniene, R. (2008). Corporate performance and the measures
of value added. Transport, 23(3), 194–201.
https://doi.org/10.3846/1648-4142.2008.23.194-201
• (PDF) Economic Value Added: Corporate Performance Measurement Tool. (n.d.).
Retrieved January 29, 2020, from
https://www.researchgate.net/publication/276417927_Economic_Value_Added_Corpor
ate_Performance_Measurement_Tool
• Measures of organizational performance / Dr Simon Moss / - Sicotests. (n.d.).
Retrieved January 29, 2020, from https://www.sicotests.com/psyarticle.asp?id=295
• Index, S. (2013). Success or struggle : ROA as a true measure of business
performance.
• The Performance Measurement Manifesto. (n.d.). Retrieved January 29, 2020, from
https://hbr.org/1991/01/the-performance-measurement-manifesto
• Putting balance score card to work – Robert S. Kaplan and David P. Norton (PDF)
• A Guide to the Big Ideas and Debates in Corporate Governance. (n.d.).
Retrieved January 28, 2020, from https://hbr.org/2019/10/a-guide-to-the-big-
References

WEBSITES
• http://www.yourarticlelibrary.com/accounting/respo
nsibility-accounting/non-financial-measures-of-perfor
mance/52924
• https://saylordotorg.github.io/text_managerial-accou
nting/s17-05-nonfinancial-performance-measu.html
• https://knowledge.wharton.upenn.edu/article/non-fi
nancial-performance-measures-what-works-and-what
-doesnt/
• https://www.cgma.org/resources/tools/essential-tool
s/performance-prism.html
HOW MUCH WEIGHT SHOULD
COMPANIES PLACE ON STOCK PRICE AS
COMPARED TO ACHIEVEMENT OF
STRATEGIC OBJECTIVES OR
CORPORATE CITIZENSHIP GOALS??
WHY STOCK PRICES ARE IMPORTANT?(1)
Those in Management are Often Shareholders Too

• The first and most obvious reason why those in management care about the
stock market is that they typically have a monetary interest in the company.
• It's not unusual for a public company's founder to own a significant number of
outstanding shares, and it's also not unusual for the company's management to
have salary incentives or stock options tied to the company's stock prices.
• The company’s management team or founder may own a substantial number of
shares. If the share price falls then this would affect their personal net worth.
Employees of the company may receive bonuses in the form of shares so if the
share price falls the value of their bonuses falls as well. For these two reasons,
managers act as stockholders and thus pay attention to their stock price.
WHY STOCK PRICES ARE IMPORTANT?(2)

Wrath of the Shareholders

• Too often, investors forget that stock means ownership. Management's job is
to produce gains for the shareholders.
• Although a manager has little or no control of share price in the short run,
poor stock performance could, over the long run, be attributed to company
mismanagement.
• If the stock price consistently underperforms shareholders' expectations, the
shareholders will be unhappy with management and look for changes.
• Shareholders are part owners of the company so they can vote out board
members if they are unhappy.
WHY STOCK PRICES ARE IMPORTANT?(3)
The Hunters and the Hunted
• To accumulate shares for the purpose of takeover, potential bidders are better able
to make offers to shareholders when they are trading at lower prices.
• For this reason, companies would want their stock price to remain relatively
stable, so that they remain strong and deter interested corporations from taking
them over.
Ego
Finally, a company may aim to increase share simply to increase its prestige and
exposure to the public. Managers are human too, and like anybody they are always
thinking ahead to their next job. The larger a company's market capitalization, the
more analyst coverage the company will receive. Essentially, analyst coverage is a
form of free publicity and allows both senior managers and the company itself to
WHY STOCK PRICES ARE IMPORTANT?(4)
The Bottom Line
A company's stock price is a matter of concern. If performance of its stock is ignored,
the life of the company and its management may be threatened with adverse
consequences, such as the unhappiness of individual investors and future difficulties in
raising capital.
Fundamentals
Share prices can be used as a gauge on the financial health of the company. Analyst
examine company earnings and the stock price to determine their opinion. There are
many financial ratios these analysts use which have the stock price in the calculation.
Stock prices can display the outlook of the company by market participants.

SOURCE: Why Do Companies Care About Their Stock Prices. (n.d.). Retrieved January 28, 2020, from
https://www.forbes.com/sites/investopedia/2014/01/23/why-do-companies-care-about-their-stock-
prices/#33b01e964f57
 CORPORATE CITIZENSHIP(1)
Corporate citizenship is about companies taking into account their complete impact
on society and the environment and not just their impact on economy. it is about
business assuming responsibilities that go beyond the scope of simple commercial
relationship.
The Economist Intelligence Unit (EIU) (November 2008) defined corporate
citizenship as follows-
“corporate citizenship is defined as transcending philanthropy and compliance, and
is addressing how companies manage their social and environmental impacts as
well as their economic contribution. Corporate citizens are accountable not just to
shareholders, but also to stakeholders such as employees, consumers, suppliers,
local communities and society at large.”
 CORPORATE CITIZENSHIP(2)
Good corporate citizenship can provide business benefit in eight
areas-
1. Reputation management
2. Risk profile and risk management
3. Employee recruitment, motivation and retention
4. Investor relation and access to capital
5. Learning and motivation
6. Competitiveness and market positioning
7. Operational efficiency
8. Licence to operate
 CORPORATE CITIZENSHIP(3)

•The corporate citizenship is all about the company's social as well

as economic relation thus the company if want to focus on the
competition prevailing in the market they have to focus more on
the stock prices rather that corporate citizenship.
•No doubt corporate citizenship too is required by corporation as it
is the major contributor toward goodwill but stock prices are more
directly linked to the company performance.
•Almost all the corporation focus on the corporate citizenship to
maintain long term relationship with society at large.
SOURCE:  
Roberts, B. S., Keeble, J., & Brown, D. (1998). The Business Case for Corporate Citizenship. 1–8.
 STRATEGIC OBJECTIVES (1)
Strategic objectives provide the organization with a broad set of goals – both in
size and scope – to reposition it in the market, improving its competitive stance
and ensuring its longevity. To achieve these goals, the organization devises
strategies to exploit its accessible resources to deliver within the planned
timeframe. The impact of these objectives is felt across the organization, as they
become part of corporate planning and influence senior management decision-
making on operational matters and overall corporate performance.
Strategic objectives are long-term organizational goals that help to convert a
mission statement from a broad vision into more specific plans and projects.
These are usually developed as a part of a two- to four-year plan that identifies
key strengths and weaknesses and sets out the specific expectations that will
allow the company or organization to achieve its more broad-based mission or
vision statement.
SOURCE: Uraidi, N., & Kumar, V. (2016). Strategic Objectives. In The Palgrave
Encyclopedia of Strategic Management (pp. 1–4). https://doi.org/10.1057/978-1-349-
94848-2_277-1
 DABUR
VISION
Dedicated to the health & well being of every household
MISSION
• Ownership: This is our company. We accept personal responsibility, and accountability to
meet business needs.
• Passion For Winning: We all are leaders in our area of responsibility, with a deep
commitment to deliver results. We are determined to be the best at doing what matters
most.
• People Development: People are our most important asset. We add value through result
driven training, and we encourage & reward excellence.
• Consumer Focus: We have superior understanding of consumer needs and develop
products to fulfil them better.
• Team Work: We work together on the principle of mutual trust & transparency in a
boundary-less organization. We are intellectually honest in advocating proposals, including
recognizing risks.
• Innovation: Continuous innovation in products & processes is the basis of our success.
• Integrity: We are committed to the achievement of business success with integrity. We are
honest with consumers, with business partners and with each other.
 HINDUSTAN UNILEVER
VISION
Our vision is to grow our business, while decoupling our environmental footprint from our growth and
increasing our positive social impact.
MISSION
Our Corporate Purpose states that to succeed requires "the highest standards of corporate behaviour towards
everyone we work with, the communities we touch, and the environment on which we have an impact."
•Always working with integrity: Conducting our operations with integrity and with respect for the many
people, organisations and environments our business touches has always been at the heart of our corporate
responsibility.
•Positive impact: We aim to make a positive impact in many ways: through our brands, our commercial
operations and relationships, through voluntary contributions, and through the various other ways in which we
engage with society.
•Continuous commitment: We're also committed to continuously improving the way we manage our
environmental impacts and are working towards our longer-term goal of developing a sustainable business.
•Setting out our aspirations: Our Corporate Purpose sets out our aspirations in running our business. It's
underpinned by our Code of Business Principles which describes the operational standards that everyone at
Unilever follows, wherever they are in the world. The Code also supports our approach to governance and
corporate responsibility.
•Working with others: We want to work with suppliers who have values similar to our own and work to the
same standards we do. Our Supplier Code, aligned to our own Code of Business Principles, comprises eleven
principles covering business integrity and responsibilities relating to employees, consumers and the
environment.
Corporate Financial Performance(1)
• Now, as we already know that when it comes to corporate financial performace,
investor as well as management look to stock price measures of the
corporation( such as total shareholder return or TSR) and accounting
numbers( such as return on equity and return on assets) and many more.
• Corporate financial performance of the companies can be measured using either
the traditional accounting based performance measures or the value-based
performance measures.
• The accounting measures are also known as the traditional measure and other
measure mainly known as value based or modern measures to measure the
financial performance of the corporation.
• The value based measure are considered to be superior than traditional measure in
some countries and in other such as developing countries the superiority of the
traditional measure are considered.

SOURCE: A Guide to the Big Ideas and Debates in Corporate Governance. (n.d.).
Retrieved January 28, 2020, from https://hbr.org/2019/10/a-guide-to-the-big-ideas-
and-debates-in-corporate-governance
 VALUATION METHODS

TRADITIONAL MODERN

RETURN ON ASSETS RETURN ON EQUITY MARKET VALUE ADDED ECONOMIC VALUE ADDED
RELATIONSHIP BETWEEN TRADITIONAL MEASURES
AND STOCK PRICE (1)
•RETURN ON ASSETS

Return on Assets is a ratio that reveals how much profit a

company earns for every rupee of its assets. It provides a
view of the management’s effectiveness. The profitability
of a company is relative to its total assets. A stock which
has an ROA higher than its industry peers is in a
stronger position.
Thus it can be inferred that Return On Asset (ROA) and
stock price have a significant influence and positive
relationship.
CASE STUDY-1
The Effects of DER, ROA and DPR on Stock Price With EPS as the
Moderating Variable in SOE
1. Independent Variables: Debt-equity ratio, Return on assets ratio, Dividend
payout ratio
2. Moderating Variable: Earning per share
3. Data Collection: The data collection method was documentation where the
researchers studied company records and annual reports of companies
4. Results: The research result showed that ROA affected stock price. ROA is
how effective a company and its management is in using its assets to generate
high profit. The higher the ratio (ROA), the higher the company profit, leading
to higher interest by investors to invest in the form of shares, thus making
stock price higher. High interest could improve the value of the company.
Higher the investors’ interest in a company would also affect stock price. The
study was in line with the studies by (Issah & Ngmenipuo, 2105), (Saeidi &
Okhli, 2012) and (Kabajeh, Nu'aimat, & Dahmash, 2012). In the study, ROA
affected stock price.

SOURCE: Haryanti, Y., & Murtiasih, S. (2019). The Effects of DER, ROA and DPR on Stock Price with EPS as
the Moderating Variable in SOE. 21, 1–08. https://doi.org/10.9790/487X-2107040108
 RETURN ON EQUITY

• ROE– Like ROA, the Return on Equity is also a comment on

the effectiveness of the company’s management. ROE is the
ratio of the company’s profits to the shareholders’ money. ROE
is a reliable indicator of the future earnings of a stock.
• Return on equity (ROE) can be defined as the amount of net
income returned as a percentage of shareholders’ equity. It is
one of the all time favorites and perhaps most widely used
overall measure of corporate financial performance (Rappaport,
1986) which was also confirmed by Monteiro (2006).

SOURCE: (PDF) Can Return on equity be used to predict portfolio performance? (n.d.). Retrieved January 19,
2020, from
https://www.researchgate.net/publication/258341502_Can_Return_on_equity_be_used_to_predict_portfolio_
performance
 CASE STUDY-2
THE INFLUENCE OF ROA, ROE, ROS, AND EPS ON STOCK PRICE

1. Independent Variables: Return on assets ratio, Return on Equity ratio, Return on Sales
and Earning per Share.
2. Methodology: This research is causal type of research and using multiple regression data
analysis tool to analyze the influence of ROA, ROE, ROS and EPS on Stock Return.
3. Result:
• ROE shows the return on equity. When an investor invests necessarily expect a return
on what has been invested. This ratio describes how well the company is able to restore
what have been invested investors. Therefore, the higher the ROE will increasingly
attract investors and lead to a rise in stock price. It has also been proven in accordance
with the results of this study (Bringham and Houston, 2010; Keown et al, 2005).
• The greater the ROA greater level of profit achieved by the company. This shows that
management can use the total assets of the company as well (current assets and fixed
assets) and will ultimately improve the company's stock price so that attract many
investors to invest. The relationship between ROA with stock prices is positive and
significant, which means that any increase in ROA can raise stock prices and significant.

SOURCE: THE INFLUENCE OF ROA, ROE, ROS, AND EPS ON STOCK PRICE
by: Carmela Pinky Manoppo
How does RoE reflect corporate performance? When a company has a low RoE, it means that the company
has not used the capital invested by shareholders efficiently. It reflects that the company is not in a position to
provide investors with substantial returns. Analysts feel if a company’s RoE is less than 12-14 per cent, it is
not satisfactory. Companies with RoE of 20 per cent and above are considered good investments. Analysts
caution investors not to consider companies that have a negative RoE, especially in this volatile environment.
They feel it is better to avoid these companies as they often are ridden with problem  excessive debt.

What is the use of RoE in stock market valuations? RoE directly impacts stock valuations — higher the
ROE, higher the intrinsic value of a company. That explains why a lot of the companies with high RoEs have
higher valuations.

Why is RoE relevant now? Indian companies’ return on equity has halved from its 2005 highs to 12.3 per
cent, said Credit Suisse. Credit Suisse said the slide in RoE has been broad-based and not specific to sectors
such as energy and materials on account of the fall in commodity prices. RoE was one of the key parameters
used by analysts to highlight the Indian corporate growth story between 2003 and 2007, which was may be
showing signs of improving.

What is an alternative to ROE? Return on Capital Employed (RoCE) is an alternative profitability

performance measure. It is a financial ratio which measures a company’s overall profitability (both of debt and
equity holders) and indicates the efficiency with which its capital (again both equity and debt) is employed.

SOUCE: Economic times, April’16

THE BOTTOM LINE
• So, be sure to look at ROA as well as ROE. They are
different, but together they provide a clear picture of
management's effectiveness. If ROA is sound and debt
levels are reasonable, a strong ROE is a solid signal that
managers are doing a good job of generating returns
from shareholders' investments.
• ROE is certainly a "hint" that management is giving
shareholders more for their money. On the other hand,
if ROA is low or the company is carrying a lot of debt, a
high ROE can give investors a false impression about
the company's fortunes.
DOES EVA BEAT ROA AND
ROE IN MEASURING
CORPORATE
PERFORMANCE?
HOW EVA IS IMPROVED MEASURE OVER TRADITIONAL
MEASURE(1)
• A plethora of studies done over the past four decades on the value-based measures,
like economic value added (EVA), claims that EVA associates better with the annual
stock returns in the economies of the developed countries.

• Traditional accounting-based performance measures like return on equity (ROE)

and return on assets (ROA), have often been found to be inadequate and unreliable
measures of shareholder’s value creation and returns (Rt) owing to accounting
manipulation and choices available due to insufficiency of related accounting
standards, non- uniformity of accounting practices, accounting distortions and poor
disclosure practices.
WHY?
• Traditional measures like ROA and ROE are one-dimensional, deficient and
backward looking because they rely on historical data and book values, reflecting
only past performance and not a future one.
• They suffer from increased noise–to–informativeness which leads to easy
manipulations of the reported accounts of profits.
HOW EVA IS IMPROVED MEASURE OVER TRADITIONAL
MEASURE(2)
• These measures also ignore risk factors and do not consider if any additional
capital has been poured into the business to generate additional income.
• These measures are prone to errors and misrepresentations if two organizations
use different inventory policies, depreciation methods or fund allocation methods
as per their industry and country specific practices.
• These measures also fail to consider the cost of equity (Ke), and account only for
the interest expense
• ROE, as a traditional measure of performance helps them to distinguish between
profit creators and the profit burners firms. It offers a gauge of profit-generating
efficiency and is a useful signal of financial success.
 PRIMACY OF EVA
• Although the term EVA had appeared in the literature as early as 1989
(Finegan, 1989; Walter, 1992), it did not receive much attention until a
september 30,1993. One major reason for EVA's sudden popularity is that it
appears to have an impressive army of corporate sponsors including such
giants as AT&T and Coca-Cola. Executives from these companies have stated
how very satisfied they are with EVA as their new measurement tool.

• As one of the most enthusiastic EVA proponents, Coca-Cola's experience is

anecdotal. Adopting EVA encouraged the company to concentrate capital in its
highly profitable soft drink business and to raise return faster than the cost of
capital by increasing the use of leverage. As a result, Coke increased its EVA
by an average of 27% annually and its stock returned about 200% from the
inception of EVA in 1987 to the middle of 1993.
Similar stories of EVA successes have been repeated by other well known companies
such as AT&T, Briggs & Stratum, Chrysler, Compaq Computer, GE, Quaker Oats, and
Scott Paper.

Dodd and Chen(1996) used the 1992 Stern Stewart 1000 database as a starting point
And added some supplementary data for the ten years from 1983 to 1992. They
gathered Complete data for 566 US companies and set out to test the claim that EVA is
a superior Measure of shareholder value performance.

In their study (bearing in mind that unadjusted data were used), the ROA displayed a
better explanatory ability than EVA did.
EVIDENCES OF SUPERIORITY OF EVA OVER ROE AND
ROA(1)
• The value relevance of value-based performance measures like EVA and market
value added (MVA), and traditional accounting-based performance measures like
ROA and ROE relative to stock performance measures, was examined based on a
sample of 452 large US companies and showed that there is a significant positive
correlation between value-based performance measures and stock returns and
concluded that EVA is a more effective performance measure than its traditional
counterparts (Lehn & Makhija, 1997).
• In developing country like India the research is conducted from the data of 1700
BSE and NSE listed company from the period 2001-2016 to check superiority of
EVA over the traditional measure particularly ROA and ROE.
EVIDENCES OF SUPERIORITY OF EVA OVER ROE
AND ROA(2)
• ROE and ROA are accounting-based measures whereas EVA is more value-based. If
the markets are efficient or even moderately efficient, there is a high chance that the
markets will absorb accounting based returns in its price in Indian corporates, thus,
it was found that ROE and ROA to be more practical in Indian context over EVA.
• Also, Indian stocks seem to be more responsive to the traditional financial
performance metrics like ROE and ROA over EVA. It seems that about 90.6 per
cent Indian corporate are not very keen on adopting EVA.
• However, as per this study EVA was found to have a significant impact on the
annual stock returns of the Indian corporates in comparison with ROE and
ROA(Agrawal & Goyal, 2018).
EVA comparison with ROCE, ROWN,EPS in measuring
shareholder value (1)
• Under conventional accounting, most companies appear profitable but many
in fact are not.
• As Peter Drucker put the matter in a Harvard Business Review article, "Until
a business returns a profit that is greater than its cost of capital, it operates at
a loss. Never mind that it pays taxes as if it had a genuine profit. The
enterprise still returns less to the economy than it devours in resources…
until then it does not create wealth; it destroys it."
• Company may intentionally pay tax to prove that they have made profit for
their shareholders and thus a falsification is done with owners that is not a
rare corporate practice.
• EVA corrects this error by explicitly recognizing that when managers
employ capital they must pay for it, as if it were a wage. It also adjusts all
distortions that are very much prevalent in the information generated by
conventional accounting.
CASE STUDY OF HINDUSTAN UNILEVER LIMITD
(HUL)

SOURCE: International Journal of Trade, Economics and Finance, Vol.2, No.1,

February, 2011 2010-023X . Valuation through EVA and Traditional Measures: An
Empirical Study.
CASE STUDY OF HINDUSTAN UNILEVER LIMITD (HUL)
(2)

Thus the comparison shows that divergence exists between the

performance results given by traditional methods and EVA. The
traditional measures do not reflect the real value addition to
shareholder’s wealth. This real value addition is clearly and easily
explained by the economic value added method(EVA).
THEREFORE IT CAN BE SAID THAT EVA IS AN
IMPROVED MEASURE OVER TRADITIONAL
ACCOUNTING METHOD IN SHAREHOLDER
VALUATION.
CASE STUDY OF DABUR

SOURCE: Rakshit, D. (2006). EVA BASED PERFORMANCE MEASUREMENT : A

CASE STUDY. 11(March), 40–59.
 
CASE STUDY OF DABUR (2)

• The Return on Investment (ROI) does not reflect

the real value addition to shareholders’ wealth and
it is not possible to judge the efficiency of any
decision, value creation or value addition aspect is
of utmost importance in the present backdrop of
corporate governance but EVA based performance
measurement system give an idea clearly about the
shareholders value addition or value destruction.
The company has been successfully able to create
value for its shareholders during the study period.
CONCLUSION
• Corporate governance is the set of rules and practices a company employs to
direct its decisions and actions. Since these rules dictate how a company
reaches its decisions, corporate governance processes have a significant impact
on a company's performance

• TSR provides an easy benchmark of relative performance across companies

and over time. Measures based on accounting metrics are less subject to
investor horizon concerns but are considered backward looking and subject to
managerial manipulation. Moreover, accounting rules are slow to keep pace
with rapid changes in business, technology, and organizational complexity. As
a result, more managers are turning to alternative measures, such as adjusted
income or cash operating return on assets, in an attempt to better describe the
unique aspects of the business that are not captured by the conventional
metrics.

• However, Indian companies do not focus extensively on newly introduced

methods of performance as a measure of shareholder’s value.
REFERENCES
RESEARCH PAPERS

•Haryanti, Y., & Murtiasih, S. (2019). The Effects of DER, ROA and DPR on Stock Price with EPS as
the Moderating Variable in SOE. 21, 1–08. https://doi.org/10.9790/487X-2107040108
•Roberts, B. S., Keeble, J., & Brown, D. (1998). The Business Case for Corporate Citizenship. 1–8.
•Manoppo, C. P. (2015). The Influence of ROA…. Jurnal EMBA, 691, 691–697.
•Economic Value Added ( EVA TM ): An Empirical Examination Of A New Corporate Performance
Measure * Shimin. Chen and James L. Dodd (2013). 9(3), 318–333.
•(PDF) Can Return on equity be used to predict portfolio performance? (n.d.). Retrieved January 19,
2020, from
https://www.researchgate.net/publication/258341502_Can_Return_on_equity_be_used_to_pred
ict_portfolio_performance
•Agrawal, A., Mohanty, P., & Totala, N. K. (2019). Does EVA Beat ROA and ROE in Explaining the
Stock Returns in Indian Scenario? An Evidence Using Mixed Effects Panel Data Regression Model.
Management and Labour Studies, 44(2), 103–134. https://doi.org/10.1177/0258042x19832397
•Ismail, A. (2006). Is economic value added more associated with stock return than accounting
earnings? The UK evidence. International Journal of Managerial Finance, 2(4), 343–353.
https://doi.org/10.1108/17439130610705526
•Reddy, N. R. V. R., Rajesh, M., & Reddy, T. N. (2011). Valuation through EVA and Traditional
Measures an Empirical Study. International Journal of Trade, Economics and Finance, 2(1), 19–23.
https://doi.org/10.7763/ijtef.2011.v2.73
•Rakshit, D. (2006). EVA BASED PERFORMANCE MEASUREMENT : A CASE STUDY. 11(March),
40–59.
 REFERENCES
WEBSITES

• Why Do Companies Care About Their Stock Prices. (n.d.). Retrieved January 28, 2020,
from
https://www.forbes.com/sites/investopedia/2014/01/23/why-do-companies-care-about-t
heir-stock-prices/#33b01e964f57
• A Guide to the Big Ideas and Debates in Corporate Governance. (n.d.). Retrieved January
28, 2020, from
https://hbr.org/2019/10/a-guide-to-the-big-ideas-and-debates-in-corporate-governance
• Uraidi, N., & Kumar, V. (2016). Strategic Objectives. In The Palgrave Encyclopedia of
Strategic Management (pp. 1–4). https://doi.org/10.1057/978-1-349-94848-2_277-1
• https://www.dabur.com/in/en-us/about/about-us/vision-mission
• https://www.hul.co.in/about/who-we-are/our-vision/
• How ROA and ROE Give a Clear Picture of Corporate Health. (n.d.). Retrieved January 29,
2020, from
https://www.investopedia.com/investing/roa-and-roe-give-clear-picture-corporate-health
/
• https://www.forbes.com/sites/investopedia/2014/01/23/why-do-companies-care-about-
their-stock-prices/#33b01e964f57
• DO COMPANIES INCORPORATE THE IMPACT
ON THIRD PARTIES AND SOCIETY INTO THE
ASSESSMENT OF CORPORATE
PERFORMANCE?
ESG as a Sustainability of Success (1)

• An increasing large number of companies make sustainability

investments and identify sustainability issues as strategically
important and release a wealth of information in the form of
environmental, social and governance (ESG) data.
• In U.S. the number of companies issuing sustainability reports
has grown from less than 30 in early 1990s to more than 7,000 in
2014, recognizing materiality of environmental, social, and
governance issues.
• An increasing number of investors integrate sustainability
performance data in their capital allocation decisions.
• ESG is important in its own right or required as a matter of
corporate citizenship for the healthy functioning of society and
the broader economy.
EVIDENCES
• U.S. firms adopted corporate policies related to
environmental and social issues before the adoption of
such policies became widespread. Firms that adopted
the sustainability policies outperform their peers over
the long-term, both in terms of stock market and
accounting performance. (Eccles et al., 2014)
• After successful engagements, particularly on
environmental/social issues, companies experience
improved accounting performance and governance,
and increased institutional ownership. (Dimson,
Karakas and Li, 2014)
ESG BENEFITS
• ESG integrates the Environmental, Social and Governance factors
into investment analysis and decision-making.
• ESG is increasingly driving:
a) the quality of companies and the way they conduct business;
b) higher economic returns that such businesses generate over the long
term – in spite of short-term or upfront financial costs;
c) investor orientation and investment mandates, and the flow of
capital;
d) higher financial returns – for businesses and investors;
e) regulatory tightening or operating risks for businesses, particularly
that are not compliant; and
f) goodwill for businesses within the sociopolitical space they operate in
g) considered in corporate decision-making
h) the financial stability of a company and it directly impacts reputation,
value and performance
i) improving the ethical impact a company can make in the long term.
ESG Issue Areas
There are several issue areas that are included like:-
• Community,
• Corporate Governance,
• Diversity,
• Employee Relations,
• Product,
• Environment,
• Human Rights,
• Air quality,
• Climate change
• Customer privacy
• Supply chain conditions,
• Carbon emissions,
• Water & energy management,
• Materials & waste,
• Audit risk & oversight,
• Board independence, structure and tenure,
• Shareholders’ rights.
 ESG and Corporate Financial Performance
• On the positive impact of ESG activities is to enhance a firm’s image it is called as the
“ESG advertising” effect. From a marketing perspective, adopting a policy of
sustainability would provide costs and benefits similar to those of an advertising
campaign.
• Waddock and Graves (1997) demonstrated a strong relationship between a company’s
reputation and ESG Disclosure.
• A strategic product sold to clients by a company and that this product is bringing
more positive revenues the sooner it is created, with late followers receiving less value
from it.
• The reasons why ESG should lead to increased performance for a firm, a widely
accepted theory in SRI is the “cost of capital” reduction. The prevailing opinion is that
the costs incurred by the establishment of a socially responsible structure in a
company are offset by a decrease in its cost of capital.
• Setting-up an ESG program within a firm has some costs that the firm expects to be
compensated by an advertising effect, more stable revenues from loyal clients and
motivated employees, and a possibly lower cost of capital, i.e., lower expected return
from investors. In the process, the company might as well lower its reputational risk
and perform better.
Source:- Khan, Mozaffar N., George Serafeim, and Aaron Yoon. "Corporate Sustainability: First Evidence on Materiality." Harvard
Business School Working Paper, No. 15-073, March 2015. and Deutsche Asset Management and University of Hamburg study.
•h
E, S or G impacts

• Another area of interest relates to which of the three ESG letters has a dominating
influence on CFP. For our sample of vote-count studies with identifiable ESG categories
in 644 studies we find relatively similar positive results for E, S and G. However, the
highest proportion of positive results occurs in G with 62.3% of all studies delivering a
positive correlation.
ESG Material Sustainable Factors
• How a company performs on material individual sustainability factors
relevant to their sector can be an important determinant of overall
performance. This is because the materiality and impact of ESG indicators
can vary depending on industry sector and geography.
• A Harvard Business School study found better future stock performance
and higher growth in accounting profitability for firms that did well on
material sustainability factors (as defined by the Sustainability
Accounting Standards Board i.e. SASB) compared with firms with poor
performance on these factors over a 20-year period.
• SASB identifies financially material issues, which are the issues that are
reasonably likely to impact the financial condition or operating
performance of a company and therefore are most important to investors.
• Ultimately, companies decide what is financially material and what
information should be disclosed, taking legal requirements into account.
 SASB identified sustainability topics from a set of 26 relevant sustainability issues under
five sustainability dimensions.
Growing Importance of ESG:
Stakeholder Perspective
 INVESTOR’S INTEREST IN ESG (1)

• As owners of and lenders to companies, investors have a

vested interest in seeing companies proactively address
material environmental, social and governance (ESG) issues
that affect short and long-term value.
• Good ESG performance is good business, helping to mitigate
risk and maximize returns, in addition to being part of a
company’s fiduciary duties. The role of investors in engaging
corporations on their management of sustainability and
governance issues is gaining attention as ESG and
responsible investing become more mainstream.
• There is now significant evidence that ESG performance is
value-enhancing, leading to significantly better shareholder
returns. The main drivers of ESG integration are risk
management and client demand.
 Investor’s Interest in ESG (2)
• According to a recent U.S.
Trust study, half of high-net-
worth investors consider
social and environmental
impact an important part of
investment decision making,
an increase from 45% in
2013. In fact, six in 10 of
these investors feel their
investments can have a
strong influence on society,
and two-thirds believe ESG
investors influence public
companies.
Source:- Report by Bank of America, Merrill Lynch- ESG: Impact on Companies Doing
Business in America and Why They Must Care
Evidences Of Investor Interest In ESG:-
A comprehensive analysis of existing research conducted by Deutsche
Asset Management and the University of Hamburg concludes that the
large majority of research shows a positive relation between ESG criteria
and corporate financial performance.

According to 2017 research by Bank of America Merrill Lynch, ESG

attributes are a better signal of future earnings volatility than any other
measure.

Academic research analyzing 2,000 US companies between 1993-2013 shows that

companies that make significant investments in material ESG issues relevant to their
industry have better future performance than companies that do not address these issues,
experiencing high growth in profit margins and superior risk-adjusted stock returns.

Research by MSCI using data for 1,600 stocks between 2007-2017 found that ESG rating
for a company are a useful financial indicator. The data revealed that high ESG-rated
companies tended to show higher profitability, higher dividend yield and lower business
specific risks, in addition to displaying less systemic volatility and higher valuations.
Continued ….
• Good corporate governance is important for
efficient capital allocation and for the
preservation and growth of capital, which
are important conditions for building
sustainable businesses in the long run.
• Unsustainable businesses are unlikely to
provide an appropriate long-run return on
savings (i.e., an appropriate return to
shareholders), long-run employment in the
community, or sustainable tax revenues.
Research About ESG And Financial
Performance
Consumers Demand Action
• Consumers are driving the growth of ESG, as they
increasingly look to align themselves with private and public
companies they believe are transparent in their business
practices and serve a greater social purpose.
• The millennial generation, in particular, is leading the
charge in holding companies accountable for their actions.
Millennials are known to consider a company’s record for
socially responsible behavior before joining as employees,
buying its products and investing in its stock.
• Maintaining interests of customers guarantees corporate
performance. When customers realized the maximization of
their interests, they are more likely to tend to recommend
corporate brand to other more customers; then to expand
channels of goods and services and to achieve more value.
 Continued….
• Not far behind is the 13-to-25-year-
old cohort known as Gen Z, which
exhibits stronger ESG preferences
than other groups. A recent study
revealed that 94% of Gen Z
respondents believe companies
should address ESG issues,
compared to 87% of millennials. In
addition, when comparing products
of similar price and quality, 92% of
Gen Z consumers would switch to a
brand that supports ESG issues
versus one that does not.

Source:- Report by Bank of America, Merill Lynch- ESG: Impact on Companies Doing
Business in America and Why They Must Care
ESG Performance- Top 10 Companies

Source:- https://www.futurescape.in/responsible-business-rankings/
Top Performing Industries
 Table 1

Table 2

• As per Table 1, Manufacturing companies, on an average, score far better than service
companies (total score of 72 for manufacturing versus 64 for service companies) overall
and across criteria.
• As per Table 2, Private sector companies perform better than public companies. While
they perform better on environmental and governance issues, they lag on social front.
Your company’s strategy must articulate a path to
achieve financial performance. To sustain that
performance, however, you must also understand the
societal impact of your business as well as the ways that
broad, structural trends—from slow wage growth to
rising automation to climate change—affect your
potential for growth. To prosper over time, every
company must not only deliver financial performance,
but also show how it makes a positive contribution to
society.

Larry Fink
CEO, Blackrock, 2018
Letter to CEOs
Regulatory Bodies
• Regulators and other entities have pushed for more transparency, socially
conscious programs and responsible practices and action to address issues.
Almost 85% of the companies in the S&P 500 Index published
sustainability or corporate responsibility reports in 2017, according to the
Governance and Accountability Institute.
• China:- Regulatory bodies like the China Securities Regulatory Commission
(CSRC), in collaboration with China’s Ministry of Environmental
Protection, has introduced requirements that will mandate all listed
companies and bond issuers to disclose ESG risks associated with their
operations by 2020.
• India:- Securities and Exchange Board of India (SEBI) has mandated
inclusion of Business Responsibility Report (BRR) as a part of the Annual
Report for top 500 listed entities and has recently decided to make it
mandatory for top 1,000 listed companies.
• U.S:- The Securities and Exchange Commission wants relevant companies
to address their use of conflict minerals, climate change and greenhouse
gas emissions and child labor oversight.
Activists
• Activists will continue to force companies to
consider their transparency and ESG policies.
• They already have successfully used social media
campaigns and shareholder resolutions to force
companies to act. Many restaurant and beverage
companies have recently pledged to eliminate the
use of plastic straws in the coming years following
environmental activism and reports highlighting
the harm plastic straws do to the earth’s oceans,
birds and sea mammals.
Suppliers
• Connecting interests of suppliers is the promoting factor of corporate
performance.
• Suppliers act as the upstream part of corporate production, whose quality of
supplies, time, quantity etc. are all critical to corporate production.
• If companies blindly pursue self-interests but harm the interests of suppliers,
like not paying on time, not delivery on time, those behaviors will lead to
estrangement between companies and suppliers, even influence corporate
production efficiency and thus performance.

Employees
• With the unemployment rate the lowest it’s been in decades, talent
attraction and retention have become top-line concerns for executives in
nearly every industry. As competition for talent heightens, aggressive salary
and benefits packages may not be enough to lure top performers to new
companies.
• Companies with a robust ESG focus will be at an advantage, as many people,
particularly younger generations, seek to work for companies with a strong
social purpose.
Stock exchanges
• Stock exchanges are establishing consistent
guidance and structures across markets. Several
stock exchanges have adopted listing rules on
ESG disclosures. 90 Stock Exchanges across the
world (including National Stock Exchange and
BSE India Ltd.) have become partners of the
United Nations-backed Sustainable Stock
Exchanges Initiative, committing to promote
sustainable investing through improved ESG
disclosure requirements of listed firms.
Government
• As for government, the measurement to corporate performance is that
corporate institution is in accordance with government regulations and
regulatory tax. Government focuses corporate performance on net
margin. Only when they obtain expected margin can companies
guarantee regulatory tax. Thus, companies need to announce related
information correctly in time to make government meet demands for
interests; and further to gain support of future development from
government.
• As survey showed us, listed companies announce more information and
indications than non-listed ones and large companies announce more
than medium and small companies from the perspective indications of
corporate capability, efficiency, level, competency, management, strategy,
top-managers, managers and quality of employees. Therefore, companies
can pursue good performance over their rivals as long as they guarantee
government’s interests. Also, only in this way can companies obtain power
source to future development.
Continued….
• National governments in their capacity as policy
makers are focusing on ESG factors as a means
to promote sustainable development at a
national level to achieve Paris agreement targets
and SDGs. Policymakers and governments across
the globe have started to issue regulations in line
with the growing importance of ESG. Across the
world 38 of the largest 50 economies in the world
have, or are developing, ESG disclosure
requirements.
Evidences
• A research conducted on private equity houses by
found that 90% of private equity house participants in
their survey believed that integration of ESG activities
and practices create value for them. (PWC, 2012)
• Another report concluded that ESG disclosure will
partially protect against shareholder’s value, drops
when bad news is announced. (Deloitte Development
LLC, 2012)
• The disclosure practice on ESG will help a company
manage its risk and pay attention to socially sensitive
issues accordingly (Koehler & Hespenheide, 2013).
Why companies incorporate impacts on third
parties and society?
• ESG Index performs better over the long-term: Companies
performing better on ESG parameters tend to be more
competitive and generate better returns, leading to higher
profitability and dividend payments, especially when compared to
low ESG-rated companies.
• Premium from investors / markets: Given that MSCI India ESG
Index is trading at a much higher value, it is apparent that
investors and markets are ready to reward good ESG
performance.
• ESG Index is more resistant to shocks / tail risks: ESG indices
experience lower frequency of idiosyncratic risk incidents such as
major drawdowns. Conversely, companies with low ESG ratings
were more likely to experience major incidents
India’s ESG Scores
• ESG disclosures steadily rising. The Social disclosure
levels more than doubled from 2010 through 2017; in
fact, India dramatically outscores USA on Social
disclosures. The country’s Environmental score too has
improved over the years and is set to improve further
amid rising awareness. While regulatory push and the
government’s pull (read ‘incentives’) are marshalling
companies into compliance with ESG standards.
• India by far lags on the Environment and Governance
parameters. And being a signatory to the Paris Treaty
and the COP21 Conference, India must abide by the
stringent environmental targets it has set for itself.

 The CSR push in India promulgated a landmark CSR law in 2014. It changed
the landscape and approach to social support that businesses provide.
India lags global standards in case of
Governance
• GOVERNANCE:- Daunting corporate governance challenges
– with some prominent ones recently – are a clarion call for
stringent governance norms, including board independence,
stronger audit committees and stricter disclosure norms.
For example, the proportion of independent directors in
India vis-à-vis Europe and the US is dismally low.
Explanation:- governance and social got a leg up with the passage of companies act 2013, while
environment though important for quite some time has benefitted from the push with the signing
of the paris accord

• Source:-
https://www.futurescape.in/responsible-bu
siness-rankings/governance-performance/
Infosys

• Carbon offset project , ‘Clean Cooking Initiative’

was named as best initiative for environmental
responsibility by the Asset Awards, the longest
running ESG Awards in Asia.
• Corporate Governance at Infosys is about
maximizing shareholder value legally,
ethically and sustainably and ensure
fairness for every stakeholder and critical
for enhancing and retaining investor trust.
So, the board takes fiduciary
responsibilities in the widest sense.
• The company recognizes and embraces
diverse board with perception, knowledge,
skill, regional and industry experience to
retain competitive advantage.
• Infosys focuses on client focus, client
engagement and client satisfaction.
• CSR
CONCLUSION
• From the financial perspective the corporate performance
can be primarily reflected through value based performance
measures as compared to traditional method available to
corporation but Indian corporations are not very keen in
adopting these measures thus, great reliance on traditional
method is given.
• The corporate performance evaluation should be
emphasized on clients and social responsibility. Only with
premium services for clients and high social responsibility,
can the corporate build a positive image in public and gain
high social popularity so as to win more trust and support in
intense competition.
 REFERENCES
• ESG : Impact on Companies Doing Business in America and Why They Must
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• Issue, S. (2015). ESG & Corporate Financial Performance : (December).
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(2019). THE ROLE OF INVESTORS IN SUPPORTING Influence Strategies for
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(2018). ESG Integration in the Americas: Markets, Practices, and Data. 98.
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