ISSN 1410 - 9018

SINERGI
KAJIAN BISNIS DAN MANAJEMEN
Vol. 10 No. 2, Juni 2008
Hal. 179 - 198

PERFORMANCE MEASUREMENT:
A STAKEHOLDER APPROACH1
Niki Lukviarman
Faculty of Economics, Andalas University
E-mail: [email protected]

Abstract

It is important that companies maintain their contractual relationships with their

stakeholder groups. Therefore, a company’s strategy needs to accommodate these relation-
ships and, consequently, there is a need for appropriate performance measurement to deter-
mine how well the company serves its stakeholders. Based on a literature review, this paper
seeks to observe current performance measurement models from the view of stakeholder theo-
ry. Although broader performance measurement models have been introduced in response to
the existence of stakeholders, these models still rely on financial indicators as primary
measures whilst using operational indicators as complementary measures. However, these
measures have recognized the importance of business performance not only to measure cur-
rent outcomes, but also to influence future outcomes. Problems in implementing broader
measures of performance include identification of relevant variables, relating action and re-
sults, and translation of projects and activities into measurable terms.

Keywords: stakeholder, performance measurement, maintaining quality

INTRODUCTION ronment for those external, internal, and

Organizations and companies in interface stakeholders that are likely to in-
particular, are facing pressures for change fluence the organization’s decisions. Conse-
which require them to provide adequate re- quently, strategic-decision making is becom-
sponses in order to survive and succeed in ing more complex as the impact of a dynam-
today’s business competition. Responses are ic company’s environment interacts with
generated by management who are required different stakeholder expectations.
to provide enhanced performance whilst For a long time, early models of
improving and maintaining quality, remain- performance measurement focused solely on
ing competitive and sufficiently flexible to financial measures, which work well for the
meet the next pressure for change (Broad- industrial era (Kald and Nilsson, 2000;
bent, 1999). One of these environment Keasey et al, 2000; Kaplan and Norton,
changes is increasing pressure from the 1992; Eccles, 1991). The emergence of the
broader and more demanding stakeholder information era in the last decades of the
groups, whose demands are now being inte- twentieth century made obsolete many of the
grated into business processes (Waterhouse fundamental assumptions of industrial era
and Svendsen, 1998). As a result, corpora- competition (Kaplan and Norton, 1996).
tions need to go beyond traditional strategic Today organizations are competing in com-
management issues by considering the envi- plex environments which require them to

1
Part of this articel have been presented at the “Integrated Business Strategy Seminar” of Graduate School of
Business, Curtin University of Technology-Australia (December 2000).

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consider new capabilities for competitive identifying relevant stakeholder groups. In

success. As a corollary, Kaplan and Norton the last section, this paper will discuss PM
(1996, p.3) believe that “the ability of a from a stakeholder perspective, followed by
company to mobilize and exploit its tangible implications for future research, and make
or invisible assets has become more decisive some conclusions.
than investing and managing physical assets,
tangible assets”. Unfortunately, financial THE IMPORTANCE OF
reporting-based measures did not cover the PERFORMANCE MEASUREMENT
valuation of a company’s intangible and PM systems have historically de-
intellectual assets that generate future veloped as a means of monitoring and main-
growth, which are critical for success in to- taining organizational control (Brignall and
day’s and tomorrow’s competitive environ- Ballantine, 1996), in order to ensure the
ment (Olve et al, 2000). Hence, other per- achievement of organizational goals and
formance measures that can cover broader objectives. Therefore, PM reflects “organi-
matters and have the capabilities to navigate zational culture and philosophy, and de-
the organizations to future competitive suc- scribes how well work is done in terms of
cess are required. cost, time and quality” (Tatikonda and
This paper argues that there is a Tatikonda, 1998, p. 49). Through an appro-
need for Performance Measurement (PM) priate PM system, an organization can moni-
which provides the framework for a strategic tor the implementation of its plans to deter-
measurement and management system from mine how successful they are, and how to
the perspective of stakeholder theory. It ad- improve them.
dresses issues relating to the changing nature From the strategic management
of PM and discusses a broader PM system, point of view, the importance of PM can be
with the inclusion of important relationships seen at all stages (Kald and Nilsson, 2000;
between a company and its stakeholders, Atkinson et al, 1997; Eccles, 1991). In de-
rather than solely traditional-financial meas- signing strategies, PM will contribute to
urement. Based on this view, companies are guidelines, to help set standards and targets
defined as a nexus of contracts (Jensen and for strategic direction. At the implementa-
Meckling, 1976), and are engaged in an in- tion stage, PM systems will be used to track
terdependent symbiotic relationship with progress, communicate strategies, and moti-
their stakeholders (Waterhouse and Svend- vate and influence people in the organization
sen, 1998). Since important aspects of con- to achieve targets. Moreover, the PM sys-
tractual relationships will have an affect on tems can contribute to the evaluation of the
the entire business process, business perfor- quality of strategic decisions that have been
mance in this paper will be viewed from a made and help determine how to improve
strategic management perspective. them, in order to reinforce new competitive
This paper begins with the im- strategies. As a result, the PM system will
portance and the changing nature of the PM have an impact on the ability of the firm to
system, followed by a review of the theory sustain its competitiveness, as well as its
of performance, which will discuss the con- ability to meet environmental changes. In
cept and domain of PM, and the develop- the absence of appropriate measures of per-
ment of various models. The paper then dis- formance, the company cannot track its
cusses stakeholder theory, and relates this business progress, nor identify its areas of
approach to the strategic management point strength and weakness in order to design its
of view, followed by a review of methods in strategy in the future. Therefore, Kald and

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Nilsson (2000) argue the importance of be seen in appendix 1. Despite differences

strategy, actions and measures within the in these arguments, limitations of traditional
company should be mutually consistent. PM can be classified into two categories
(Ghalayani and Noble, 1996, p.64): “general
Traditional Performance Measurement limitations due to overall characteristics and
System limitations specific to certain traditional
Early models of PM focused solely performance measures such as productivity
on financial-accounting measures, and this or cost”.
‘formal’ PM system (Atkinson et al, 1997) However, researchers on PM have
is an extension of the company’s financial not agreed to disregard financial measures
reporting systems. Financial performance within the PM systems, because they argue
indicators remained the single most im- that financial measures are legitimate and
portant performance measurement until important indicators (Eccles and Pyburn,
1980s (Ghalayani and Noble, 1996). In the 1992; Jesuthasan et al, 2000), and necessary
late 1980s, performance studies flourished, as long as measures of residual claims are
as it was hoped that overall effectiveness required for legal economic reasons (Water-
measures could be constructed as a result of house and Svendsen, 1998). Indeed Chow et
changes in the world market (Meyer and al (1997, p.22) argue that “financial
Gupta, 1994; Ghalayani and Noble, 1996). measures should be retained and viewed in
In fact, the current interest in the perfor- the larger context of the company’s competi-
mance construct is on the critical role of PM tive strategies for creating future value”. In
systems in maintaining an organization’s short, these arguments suggest that the ap-
competitive position (D’Souza and Wil- propriate PM system is the one that does not
liams, 2000). Within this context it might be emphasize financial measures alone.
argued that continuing development of PM In addition, managers should not
is necessary for any further improvement to have to choose between financial and non-
accommodate the changing environment in financial measurement (Kaplan and Norton,
the future, as well as reflecting more appro- 1992), and they should not be viewed as
priate PM models. substitutes for each other (Epstein and Man-
Finance-based PM is considered to zoni, 1997). Accordingly, Kaplan and Nor-
be the ‘traditional PM system’ that has been ton (1992, p.72) state that ‘no single meas-
claimed to measure “too many things and ure can provide a clear performance target
the wrong things” (Atkinson, et al, 1997, of focus attention on the critical areas of the
p.25). The corollary of this is that this model business’. Although financial indicators are
has been of little help in measuring perfor- important, these measures are the result of
mance in the new competitive environment past performances and inadequate for guid-
(Chow et al, 1997), as a result of its back- ing and evaluating the company to create
ward-looking focus (Jesuthasan et al, 2000). future value. Therefore, it might be better to
Several researchers have also provided their consider additional measures of current per-
arguments on the shortcomings of such a formance as indicators of future perfor-
measurement system. Critics of the use of mance to properly monitor a company’s
traditional performance systems as the only progress.
bases in judging business performance can
The Changing Nature of the Performance As the economy becomes global-
Measurement System ized, the market instigates corporate envi-
ronmental changes, promoting stiffer and

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more complex competition. Consequently, a (Meyer and Gupta, 1994). Some arguments
number of new techniques for organizing from researchers on the need to change PM
and managing companies have been intro- system, apart from financial-based PM, are
duced (Dent, 1996). In order to enable cor- described in appendix 2. In general it might
porations to respond to opportunities and be argued that navigating the company into
challenges faced in their market environ- a more competitive, technological, and ca-
ment, they have to consider and reinforce pability-driven future, cannot be accom-
new competitive strategies. A clear and fo- plished merely by monitoring and control-
cussed strategy allows the company to de- ling financial measures of past performance.
sign its performance measurement and eval- Based on this serious dissatisfac-
uation system to concentrate the manager’s tion with financial measures and the need
attention on the strategy’s key success fac- for a much broader PM system, many re-
tors (Epstein and Manzoni, 1997; Atkinson searchers (see appendix 2) urge the devel-
and Epstein, 2000). Thus, in a dynamic envi- opment and improvement of PM. However,
ronment, it is essential for the company to the objective of broadening PM is not simp-
keep performance measures current and rel- ly to include non-financial indicators to
evant. measure outcomes that cannot be covered by
Some measures describing business financial measures. A more fundamental
performance cannot dominate for long and reason is the need to incorporate factors in
may shift dramatically over time. This is PM that will determine or influence future
because such performances lose usefulness outcomes and could balance various indica-
as a result of declining in their ability to tors of measurement (Olve et al, 2000).
discriminate ‘good from bad’ performance Thus, it is expected that PM should also
(Meyer and Gupta, 1994). Moreover, a dy- consist of important indicators that could be
namic environment requires companies to used as the drivers of a company’s future
make more complex strategic decisions, performance and emphasize the actions nec-
where the outcomes extend over a longer essary for long-term success.
period (Waterhouse and Svendsen, 1998) The need to supplement financial
and requiring different and more dynamic measurement with others that cover broad
measures. Consequently, relying on tradi- business matters brings us to the issue of
tional finance-based performance measured which areas need to be considered. This is-
systems has failed to supply the information sue is deemed important since business as-
necessary to elicit strong future performance pects are so broad and all of them could
from the organization. seem equally important. As a corollary, a
The need for the companies to further issue in its operationalization is how
change to a PM that is relevant to current to cover such broad areas, make them meas-
development in business environment is urable and balance, in order to achieve the
undoubtedly important. Dixon et al. (1990) objectives of PM. In short, it is significant to
argue that in order for companies to compete consider the broader-set of measurement
with industry leaders, they have to change systems, without losing the focus and objec-
their ways of measuring performance. Addi- tives of business performance measures.
tionally, in order to be effective, perfor- Chakravarthy (1986) argues that
mance measures need to reflect the changes organizational performance and organiza-
in competitiveness (Tatikonda and Tatikon- tional effectiveness are two of the labels
da, 1998) and the fact that there are continu- under which aspects of strategic perfor-
ous of change in the dominant measures mance should be measured. However, he

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believes that there is little agreement on how in the development and the implementation
performance should be measured. Several of every PM system.
researchers, in regard to the aspects that In addition, Meyer and Gupta
should be considered in developing broad (1994) believe that one purpose of organiza-
performance measurement, provide their tional design is to promote comparability
arguments, as can be seen in appendix 3. In and variability, and therefore both of them
summary, it can be argued that such broader are key properties of any performance
PM should include a ‘mix and balance’ of measures. Accordingly, they argue that
financial and non-financial (operational) comparability is ‘the extent to which a
measures as well as reflecting companies’ measure is valid across several settings’, and
contribution to their stakeholder groups. variability is a ‘measure’s capacity to cap-
Based on the factors to be consid- ture a range of performance outcomes’
ered in developing a broader-set of criteria (p.310). Therefore, PM requires comparabil-
for a PM system, it might be argued that ity and yet should exhibit variability in order
such PM is the system that is designed to to discriminate between good and bad per-
accommodate and satisfy the diverse inter- formers. As a result, one might argue that if
ests of stakeholders. Consequently, there is a a specific PM has lost these key properties,
tendency to depart from solely traditional- it has already lost its usefulness in providing
financial measurement systems, which em- adequate measures to differentiate between
phasize maximization of shareholders’ val- high and low performers.
ue. Therefore, the attempts to measure satis- Moreover, Meyer and Gupta (1994)
faction of all of the firm’s stakeholders are argue that many measures are running down
important. Indeed, the intention to include because they lose variability and hence their
the measurement of various interests of capacity to measure performance. Therefore,
stakeholder expectations could be seen as such measures will tend to be less proactive
discriminators of strategic performance indicators of potential business problems
(Chakravarthy, 1986). In brief, the pressure (Epstein and Manzoni, 1997) and can no
towards broadening a company’s accounta- longer meet their objectives. According to
bility from stockholders alone, to include Meyer and Gupta (1994, pp.331-347) there
interests of other stakeholder groups, is ob- are many forces which tend toward the run-
vious. ning down of a PM by driving out variabil-
ity. Four of them are positive learning, pre-
THE THEORY OF PERFORMANCE serve learning, selection, and suppression.
The Key Properties of Performance Meas- However, Meyer and Gupta (1994) argue
urement that aside from those factors, external condi-
Performance indicators should re- tions can also induce variability into perfor-
flect the impact that a modern organization mance measures. Therefore, they argue that
has on the world around it and how it is per- changes in environments may have an effect
ceived. Atkinson and Epstein (2000), argue on existing performance measures. In line
that companies must refrain from adding too with this argument, Broadbent (1999) be-
many measures in their PM system. These lieves that the environment is of growing
writers also believe that there is a longstand- importance and will become part of the de-
ing tradition that a performance measure veloping agenda of PM. In summary, it is
should have three attributes, namely be clear that comparability and variability are
complete, be measurable, and be controlla- the important key properties in any perfor-
ble (p.27). These attributes provide insights mance measures. Hence, any changes in PM

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should consider the importance of these as the core domain), they argue that most
properties. strategy studies have restricted their focus to
the first two. They believe that this tendency
The Domain of Performance Measurement is due to the availability of data and their
The important issue to be addressed in the implications for operationalization. This
discussion of PM is to delineate the domain argument is supported by Kald and Nilsson
of performance concept (Venkatraman and (2000) who state the difficulties in using a
Ramanujam, 1986). From the view of strate- broader-set of PM criteria in translating pro-
gic management, they argue that the PM grams and activities to be measurable.
concept can be differentiated using three Therefore one might argue that the opera-
domains (p.803), as follows: tionalization and benefit of PM system in
 Domain of financial performance, the organizational context are important
which is the narrowest concept of busi- issues in designing PM.
ness performance by using simple out-
come-based financial indicators that are The Development of Various Models
assumed to reflect the fulfilment of the The PM system is needed to meas-
economic goals of the firm. This ap- ure the achievement of a company’s objec-
proach remains very much financial in tives resulting from strategy implementation
its orientation and assumes the domi- and decision-making processes. In consider-
nance and legitimacy of financial goals ing the stakeholder model in designing a
in a firm’s system of goals. company’s strategies, corporate goals should
 Domain of financial and non-financial be defined more widely than shareholders
(operational) performance as a broader profits (Keasey et al, 1997). Therefore, cor-
conceptualisation of business perfor- porate goals should include the legitimate
mance that include emphasis on opera- interests of all relevant stakeholders in the
tional performance in addition to indica- important operational and strategic decisions
tors of financial performance. This ap- the company makes (Barringer and Harri-
proach seems to focuses on key opera- son, 2000). Waterhouse and Svendsen
tional success factors that might lead to (1998) also endorse the importance of cor-
financial performance. porate strategy to be defined in terms of how
 Domain of organizational effectiveness, the company will manage the contracts it
which are predominantly used if the has with its key stakeholders
multiple and conflicting nature of or- As organizations attempt to com-
ganizational goals and the influence of pete successfully in the information era, they
multiple constituencies or stakeholders are turning to a variety improvement pro-
are superimposed. grams to enable them to adopt environmen-
tal changes. However, Kaplan and Norton
Although a broader conceptualisa- (1996) argue that such programs should not
tion of PM is welcomed, Venkatraman and be fragmented and need to be linked to the
Ramanujam (1986) argue that there is a con- organization’s strategy and to specific finan-
siderable debate on the use of the organiza- cial and economic outcomes. Therefore, the
tional effectiveness domain as a broader PM system needs improvements to incorpo-
concept among those three. However, de- rate multiple business aspects, in order to
spite the fact that each of these domains is a broaden the company’s focus in an envi-
subset of the overall concept of organiza- ronment governed by broader interests.
tional effectiveness (with financial domain

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 Performance Measurement: A Stakeholders Approach (Niki Lukviarman)

Several PM models have been de- phasizes “a mix of learning-appropriate and

veloped that could be considered as im- decision-relevant financial and non-financial
provements on the traditional-financial measures” (Waterhouse and Svendsen,
models. Some of these models can be cate- 1998, p.5).
gorized as ‘shareholder value measurement Both the shareholder-value meas-
models’. Three among these models are (a) urement and the environmental related PM
Shareholder Value Analysis (SVA) proposed models seem to correspond with the increas-
by Alfred Rappaport, (b) Economic Value ing needs of an appropriate PM system. This
Added (EVA) developed by Stern Stewart & innovation clearly requires a major shift in
Co., and (c) Total Shareholder Return (TSR) the mind-set of managers about managing
and Total Business Return (TBR) developed organizations. Consequently, managers have
by the Boston Consulting Group (Barbera to develop and articulate strategies more
and Coyte, 1997). These models are very carefully, treat the organization as an inte-
much finance-related and take the position grated and co-ordinated set of activities, and
that business processes’ ultimate success can link the strategy to performance.
be viewed through focussing on financial
performance measures (Broadbent, 1999). STRATEGIC MANAGEMENT:
However, the proposers of these models A STAKEHOLDER PERSPECTIVE
claim that traditional accounting methods Stakeholder Theory
and the shareholder value methodologies Since the 1960s, the conceptual
vary in complexity (Barbera and Coyte, revolution in the discipline of management
1997). Therefore, it might be argued that has given rise to concerns regarding how the
these models are still in the first (core) do- organization’s executives manage an in-
main of performance measurement, the do- creasing number of external forces and pres-
main of financial performance, which em- sures (Freeman, 1983). Since then, the con-
phasizes the importance of maximizing cept of ‘stakeholder’ has grown in im-
shareholder value. portance and “it takes a place at the center of
The other improved models are the the strategic management paradigm” (Free-
‘environmental-related PM models’ (Broad- man, 1983, 32). As a result, the interests of
bent, 1999). These have been claimed to the company’s stakeholders should be taken
consider the company’s environment, par- into consideration in designing strategies.
ticularly stakeholders, as an increasingly The term ‘stakeholder’ in a busi-
important aspect of management practice. ness context was introduced by the Stanford
Two among these models are (a) the Bal- Research Institute in 1963 and was original-
ance Scorecard (BSC), proposed by Kaplan ly defined as “those groups without whose
and Norton, and (b) the Strategic Perfor- support the organization would cease to ex-
mance Measurement (SPM), proposed by ist” (Freeman, 1983, p.33; Mitchell et al,
Atkinson, Waterhouse and Wells. The BSC 1997, p.854). This word can also be defined
has become widespread, integrating stake- as “any group or individual who can affect
holder groups while considering both long- or are affected by the achievement of the
term and short-term perspectives and the organization’s objectives” (Barringer and
internal business processes quite specifically Harrison, 2000, p.376). Based on this defini-
(Olve et al, 2000; Broadbent, 1999). Its pro- tion, an organization’s stakeholders have
posers have claimed the SPM model as ‘a two characteristics (Atkinson, 1998, p.554);
comprehensive measurement system’ that is (a) they affect the organization’s ability to
based on a stakeholder approach, and em- achieve its objectives, and (b) they require

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something in return for helping the organiza- survival of organizational forms is “the abil-
tion to achieve its objectives. ity of a corporation to maintain its interde-
Mitchell et al (1997) argue that pendent relationships with its key stakehold-
there is not much disagreement on what kind ers” (Waterhouse and Svendsen, 1998,
of entity can be a stakeholder. They believe p.25). Thus, the central notion of the corpo-
that “persons, groups, neighbourhoods, or- ration from this perspective is that compa-
ganizations, institutions, societies, and even nies are engaged in an interdependent, sym-
the natural environment” are generally biotic relationship with their stakeholders
thought to qualify as actual or potential (Sternberg, 1997). This means that compa-
stakeholders (p.855). However, the groups nies cannot avoid stakeholder relationships
typically cited as stakeholders include cus- because every organization is dependent on
tomers, suppliers, employees, local commu- its stakeholders. Therefore, one might argue
nities, government and shareholders (Ber- that, in decision-making processes and in
man et al, 1999; Hill and Jones, 1992). Each designing its strategies, the company should
of these groups can be seen as supplying the accommodate the impact of decisions on the
firm with critical contributions and in ex- company’s relationship with its stakeholders
change each expects its interests to be satis- as well. In turn, the choices the company
fied. Therefore, Barringer and Harrison makes in strategic planning must direct and
(2000) view the relationship between an inform the design of the PM system (Atkin-
organization and its stakeholders as an ‘in- son et al, 1997).
ter-organizational relationship’ through alli-
ances that could help firms to create value. Strategic Management and Stakeholder
An organization has been defined Approach
as ‘a nexus of contracts’ (Jensen and Meck- Organizations have stakeholders.
ling, 1976; Fama and Jensen, 1983). Such Therefore, in developing and implementing
contracts specify or imply what an organiza- strategies every organization should consid-
tion expects from each stakeholder group to er those groups who can affect and are af-
help it to achieve its primary objectives, and fected by an organization’s objectives
what each stakeholder expects from the or- (Freeman, 1983). Accordingly, he (1983,
ganization in return for participation (Shleif- p.43) argues that “the strategic management
er and Vishny, 1997). Within this context, paradigm could be enhanced by including
the role of PM is to monitor the give and the stakeholder concept in its processes”.
take expressed or implied by each of these Aside from its concrete applications as a
contracts. Therefore, it might be argued that framework for environmental analysis,
one of the most important managerial func- Freeman believes that the basic philosophi-
tions is to establish and maintain stakeholder cal issue of stakeholder approach in strategic
relationships to achieve the company’s ob- management is a “thorough understanding
jectives. As a result, the stakeholder’s capac- of the effects of organization on its stake-
ity, opportunity, and willingness to threaten holders”. Additionally, by combining “an
or cooperate must be considered in design- analysis of stakeholders, values and societal
ing and implementing the company’s strate- issues, executives can address the difficult
gy. question of the role of organization in socie-
From the point of view of contrac- ty at large” (p.44). This process can be seen
tual relationships, an important factor in the in figure 1 below.

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 Performance Measurement: A Stakeholders Approach (Niki Lukviarman)

ENTERPRISE
STRATEGY

STAKEHOLDER VALUES SOCIETAL

ANALYSIS ANALYSIS ISSUES

Who are stakeholders? What are the dominant

organizational values? What are the major issues
facing our society over the
next 10 years? (Economic,
What effects do we have on
Political, Social,
each in economic, political What are the values of the
Technological, etc)
and social terms? key executives and board
members?

How do these stakeholders How do these issues affect

perceive these effects? What are the values of the our organization and our
key stakeholders? stakeholders?

Source: Freeman (1983, p.45)

Figure 1: Enterprise-Level Strategy Process

According to Freeman (1983, p.38) The need to consider a broad range

the definition of ‘stakeholder’ implies that of stakeholders in formulating strategic di-
the strategic management process must in- rections has several implications for the stra-
clude a method for mapping stakeholders tegic management paradigm (Freeman,
and understanding the “stake” or potential 1983, p.39 - 41):
influence of each group. This mapping is  The strategic task of environmental
important for the company in order to rec- analysis must yield accurate descrip-
ognize each category of stakeholder and tions of stakeholder behavior and must
their expectations from the company’s oper- bound (not forecast) future behavior.
ations. Additionally, in order for the stake- Ultimately, the environmental analysis
holder concept to be a useful addition to the process must have a stakeholder-like
strategic management paradigm, Freeman concept
(1983) argues that it must be capable of  The traditional analytical tools such as
yielding concrete descriptions and pragmatic SWOT analysis, industry-company
categorizations of both stakeholder behavior analysis etc, need to be rethought in
and generic strategies for stakeholders. terms of the business’s ability to man-
Therefore, he believes that through assessing age important stakeholder relationships.
stakeholder behavior at the corporate level, Hence, the successful company must
it will be possible to “enrich the understand- take into account its relationships with
ing of the forces that shape competitive multiple stakeholder groups and must
strategy” (p. 46).

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understand the differential power and  How should we weigh the concerns of
stake of each group. the least well off or least powerful
 The stakeholder concept represents a stakeholders versus “wealthier” groups?
generalization of many of the concepts
currently in use. Thus, techniques, con- According to Freeman, the basic
cepts, and research which can be used answers to these questions are the need for
to understand customers and suppliers shifting from short-term financial measures
can also be applied to other stakehold- to long-term social measures. He argues that
ers. appropriate measures should be able to bal-
ance the interests of a host of stakeholder
From the above-mentioned factors, groups, which can help managers to define
one might argue that a firm’s strategic man- the appropriate trade-offs to be made. Since
agement process for understanding the ex- there is no concrete answer to the operation-
ternal environment can be improved by un- alization of these measures, the development
derstanding its stakeholders. Therefore, the of adequate PM models poses challenges to
ability of the company to manage its rela- management scholars.
tionships with multiple stakeholders and
understand their differential powers can fa- Identifying Stakeholder Group
cilitate the company’s achievement of its The main role of PM in strategic
objective. Firms with good relationships management is already obvious: it is to en-
with their stakeholders, on the basis of mu- sure that an organization pursues strategies
tual trust and cooperation, will have a com- that lead to the achievement of overall goals
petitive advantage over firms that do not and objectives. Additionally, in order to sur-
(Jones, 1995). Hence, there should be some vive in a dynamic environment, with the
recognition of the importance of stakeholder growing importance of stakeholders, com-
groups having long-term association with panies have to maintain their networks with
the company and, therefore, an interest in its key stakeholders. Therefore, companies’
long-term success. abilities to align and balance their own in-
However, the application of the terests with the interests of stakeholders are
stakeholder approach in strategic processes critical to achieve the company’s objectives
raises some important questions, particularly and also to reduce environmental uncertain-
in relation to performance measures. The ty (Barringer and Harrison, 2000).
questions are (Freeman, 1983, p.53; Vinten, As a nexus of contracts, a company
2001,p.41): has both implicit and explicit contractual
 What are stakeholder interests and / or agreements with its stakeholders. Despite
rights? the fact that each stakeholder groups can be
 What responsibility has the firm to each seen as supplying the firm with critical re-
stakeholder’s group? sources or contributions, they have different
 How do we measure how well an organ- stakes in the firm (Hill and Jones, 1992).
ization is doing with its stakeholders? Hence, one could expect potential conflict of
 What are the relevant variables? interests among various stakeholders, which
 What are appropriate measures? may need to be resolved by the company.
 What are appropriate measures of the The stakeholder perspective envi-
relative power of suppliers, customers, sions organizations at the center of a net-
government groups, and other stake- work of stakeholders. However, most atten-
holders? tion should be given to the legitimate inter-

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ests of the relevant and key stakeholders these criteria, these writers believe that the
(Sternberg, 1997; Mitchell et al, 1997; Sav- firm can determine specific stakeholder in-
age et al, 1991). Thus, determining which terests to be addressed and can focus its at-
stakeholders matter most will resolve the tention on these specified interests rather
potential conflict of their multiple interests than a broad, societal definition of stake-
in designing the strategy. Consequently it holders. Hence, managers must devise strat-
requires appropriate PM models to measure egies that will coordinate and balance the
the achievement of a company’s objectives interests of these various groups (Harrison
based on such a strategy (Barringer and Har- and Freeman, 1999; Barringer and Harrison,
rison, 2000). 2000).
However, before considering the
PM system that is appropriate to accommo- DISCUSSION: PERFORMANCE
date the interest of a company’s stakehold- MEASUREMENT AND
ers, the issue of how to divide them must be STAKEHOLDER APPROACH
addressed, because it is much easier for the The stakeholder approach high-
company to treat their stakeholder as a ‘lim- lights the importance of taking stakeholder
ited grouping’ rather than treating the broad- preference into account in every business
er concept as mentioned by Freeman. In process and focuses on overseeing relation-
addition, from the stakeholder perspective, ships that are critical to an organization’s
all stakeholders cannot be considered equal- success. The role of stakeholder theory is
ly important and there should be a way to seen to extend past the formulation of strat-
determine which stakeholders matter most egy to the establishment of performance
(Barringer and Harrison, 2000). goals. Through maintaining close relation-
Much of the literature on stake- ships and possibly alliances with key stake-
holders has focused on identifying primary holders, a company can expect long-term
and secondary stakeholders (Mitchell et al, cooperation that will lead to mutual benefits.
1997; Savage et al, 1991). The primary Hence, one could expect better performance
stakeholders are those who have formal, of such a company in the future.
official, or contractual relationships and As a nexus of contracts, every
have a direct and necessary economic im- company has contractual relationships with
pact upon the organization. Secondary its stakeholders, who require companies to
stakeholders are diverse and include those accommodate their interests. The stakehold-
who are not directly engaged in the organi- er approach conceives of the set of relation-
zation’s economic activities but are able to ships between the organization and its
exert influence or are affected by the organi- stakeholders as a nexus of contracts. There-
zation (Savage et al, 1991, p.62). Therefore, fore, appropriate strategies, and hence PM
there is a need to identify relevant stake- systems, should incorporate the relationships
holders, using certain criteria so that none of that exist, in order to achieve the company’s
them are excluded from management atten- objectives. Since there are potential conflicts
tion. among various interested parties, companies
According to Sternberg (1997) should also balance these interests whilst
there are three criteria that determine the basing business processes on the strategies
groups of stakeholders: materiality, immedi- that have been developed.
acy and legitimacy criteria, while Mitchell et I agree with the arguments that fi-
al (1997) propose the following attributes: nance-based measures alone are inadequate
power, legitimacy, and urgency. Based on in assessing business performance. Howev-

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er, as has been argued by several research- for future financial outcomes, whilst the
ers, such measures should be retained and SPM model perceives the secondary objec-
expanded, since they are still important indi- tives as the drivers for the company to
cators for every PM system. Hence, it could achieve primary objectives. Although the
be argued that non-financial (operational) needs of stakeholders group other than
indicators are not a substitute or replacement shareholders are considered a secondary
for financial indicators. Rather, they should concern, at least both models have already
be seen as a complement and enhancement included the importance of other stakehold-
to leading indicators of the financial ers in their PM models. Besides, the BSC
measures in order to expand the traditional model for example, has introduced the im-
PM system. Therefore, it can be argued that portance to balance various interests within
the changing nature of any PM is towards a the company that should be reflected in the
broader system that can accommodate the company’s strategy. In addition, both mod-
growing importance of other issues that can- els provide information that might be im-
not be covered by finance-based indicators portant and required by relevant stakehold-
alone. By linking both indicators to critical ers in the company
management activities (i.e. strategy), PM However, based on performance
models can help companies to monitor and concepts by Venkatraman and Ramanujam
manage the implicit and explicit contracts (1986), it seems that improved PM systems,
they have with stakeholders. In summary, particularly the BSC and SPM which con-
the role of PM is to monitor the give and sider other stakeholders are still in the sec-
take implied by each of these contracts. ond domain (i.e. domain of financial and
Another issue regarding the need operational performance). According to
for an improved PM system, as a vital part Kald and Nilsson (2000), the use of financial
of the changing nature of PM, is the im- and selected operational performance indica-
portance of viewing PM not only as the tors, rather than overall organizational effec-
measure of outcome but also to use its indi- tiveness, brings up the difficulty of translat-
cators as the drivers for future performance. ing non-financial measures into financial
Proponents of shareholder-value models also ones. One difficulty in implementing the
agree with the importance of the drivers of SPM model, for example, is how to translate
value for shareholders that were identified as secondary objectives (i.e. customer satisfac-
return, cash flow and asset growth, which tion or quality of service) into measurable
are all finance-related values. Although the outcomes such as profit. In general, it can be
proposers of the shareholder-value meas- argued that these problems arise from diffi-
urement have claimed that their models are culties relating to management action and
different from traditional financial- results. Therefore, major limitations on the
accounting models, these models still use use of broader-set performance indicators
financial measurement as their leading indi- are contributed by its operationalization,
cators. All of these models still perceive the availability of data, and any consideration in
importance of the goal of creating share- order not to lose the objective of perfor-
holder value. Through the adoption of value- mance measurement.
based management, these models assume Moreover, there is a potential prob-
that the creation of value for its shareholders lem in considering diverse interests of
is fundamental to the success of any company. stakeholders in the company’s business pro-
On the other hand, the BSC model cesses. Although there is an approach to
views operational measures as the drivers regrouping and mapping, in order to identify

190
 Performance Measurement: A Stakeholders Approach (Niki Lukviarman)

key stakeholders, it is still difficult to con-  Short-term performance via financial

sider and treat them according to their just measures and the value drivers for supe-
deserves. Because groups may have conflict- rior long-term financial and competitive
ing interests that may affect strategic im- performance.
plementation and, hence, could harm the
achievement of the company’s objectives, it Therefore, one of the most im-
might be argued that this factor is one con- portant roles of balanced PM is that it makes
sideration for the proposers of improved PM a systematic attempt both to measure those
models not to consider all stakeholder relationships and communicate them to op-
groups in their models. This may be why the erating managers, and provides a basis for
environmental-related models focus only on organizations learning about those relation-
some aspects of performance relative to each ships (Atkinson and Epstein, 2000).
stakeholder group. Unlike the shareholder-value
The BSC model, for example, does measurement models, both the BSC and
not state explicitly that this model is based SPM models of performance have recog-
on the stakeholder approach nor does it take nized the importance of stakeholders in the
into account all the stakeholders mentioned business process. However, it can be seen
by the theory. This model only implicitly that both models still emphasize the finan-
considers several interests that are: custom- cial indicators from the fact that these indi-
ers, suppliers, and employees (in terms of cators take place as primary goals (the BSC)
innovation and learning perspectives). The and primary measures (the SPM). Other
SPM model, on the other hand, explicitly non-financial (operational) indicators are
states that this model is based on the stake- treated as secondary goals or measures,
holder approach. This model includes a which are viewed as the drivers of the pri-
much broader stakeholder base than the mary goals or primary measures. Therefore,
BSC: shareholders, customers, employees it can be argued that those secondary goals
and community. However, both models have or measures are instrumental in helping the
widened their scope of measurement to in- company achieve its primary objectives in
clude stakeholder interests, although limited both models.
to certain groups. Additionally, both already Another problem in the implemen-
recognize the importance of PM, not only to tation of PM is that various models cannot
measure outcomes, but also as the drivers of be generalized and should be tailored to spe-
future performance. cific industries where the company operates.
Other related issues to be consid- Additionally, it might be difficult to apply
ered in the improved PM systems include this kind of model in very large corporations
the importance of balance between various (such as IBM) that might have thousands of
measures. The BSC model (Kaplan and Nor- stakeholders. Although grouping and identi-
ton, 1996) for example, incorporates a bal- fying key stakeholders is possible for IBM,
ance between: the problem may be how to treat every
 External measures for shareholders and member of the group of suppliers (as com-
customers, and internal measures of pany’s stakeholders) equally, because all of
critical business processes, innovation, them can be considered important.
and learning and growth,
 The outcome measures - the results
from past efforts - and the measures that
drive future performance, and

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IMPLICATIONS FOR FUTURE mance variables that best reflect its rela-
RESEARCH tionship with its key stakeholders?
On the basis of the issues that have  How to design a PM system that is tai-
been discussed in this paper, one can envi- lored to meet the needs of each compa-
sion refinements in long-standing PM sys- ny’s business and could be expanded to
tems designed to assist managers in dealing take into account the critical stakeholder
with a more complex company environment. relationships the firms depend on to
Presently, PM systems which place empha- prosper?
sis on the stakeholder are being utilized to  How could different organizations con-
help managers deal effectively with multiple nect together all of the financial and
stakeholder relationships. Current PM mod- non-financial measures in a coherent
els, particularly the environmental-related and comprehensible manner?
models, include identification of stakeholder  How to formalize the inclusion of em-
roles within companies. Through the stake- powered stakeholder groups that may
holder approach, the set of relationships have no formal representation in the or-
between the organization and its stakehold- ganization?
ers are being articulated as a nexus of im-
plicit and explicit contracts. Therefore, the Finally, since the pressure exerted
role of PM from this point of view is to by the organization’s stakeholders influ-
monitor the give and take expressed or im- ences the performance goals set by a man-
plied by each of these contracts. ager, it will have an affect in designing the
PM models that incorporate and company’s strategy. Therefore, in attempt-
balance various stakeholder interests within ing to develop an appropriate PM system
the company have the potential to improve based on the stakeholder approach, the said
upon current practice. They hold the key to PM should be linked and driven by strategy.
more effective management and to a more
useful, comprehensive theory of the firm in CONCLUSION
the society. Focusing attention on salience in In a dynamic environment with in-
the company-stakeholder relationships exist- creasing importance on contractual-
ing in a firm’s environment appears to be a relationships with its stakeholders, compa-
productive strategy for future research in nies are required to consider these groups in
developing appropriate PM system. The PM their business processes. As a result, the
models, therefore, must reflect “the com- company must introduce and maintain new
plexity of business today, and the height- ways of managing its relationships as well
ened requirement for world-class perfor- as measuring business performance, includ-
mance in far more aspects of corporate op- ing various stakeholders’ interests. This
erations – from emphasizing innovation to view shifts the importance of maximizing
fostering diversity” (Atkinson and Epstein, the single most important shareholders, to-
2000, p.28). wards the company’s accountability to a
In relation to PM models that take more diverse group of stakeholders.
into account the important relationships with Several models, including the BSC
the company’s stakeholders, there is a need and the SPM, have been introduced in re-
for empirical research that answers these sponse to these needs which can be catego-
questions: rized as a part of the second domain of per-
 How to develop the framework that formance measurement. Neither model,
could identify the company’s perfor- however, considers all stakeholder groups,

192
 Performance Measurement: A Stakeholders Approach (Niki Lukviarman)

treating some of them as only secondary and Although improved PM has taken
as an instrument to achieve primary goals. the stakeholders into consideration, one
Primary goals for both models are still the might argue that financial measures still
shareholder group, emphasizing the im- continue to be the end measures of a compa-
portance of financial indicators as measures ny’s performance. A major problem in the
of residual claims for the company’s share- implementation of PM models that have
holders. Thus, other stakeholder groups, broadened their indicators of measurement
which are considered a secondary concern, to include other non-financial (operational)
are seen as drivers of future financial per- indicators is in their operationalization.
formance. In general, these models foresee Therefore, the overall appropriateness of a
that improvement of secondary measures PM system is important, as well as the bene-
will result in improved future performance. fits it might be contribute to the achievement
of the company’s objectives.

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Appendix 1
Critics of Traditional Financial-based Performance Measurement

Author (s) Limitations of financial indicators

Kald and Nilsson Concentrate too much on the past; focus excessively on the short run; over
(2000) emphasize the financial aspects of businesses
Waterhouse and Inadequate for managing and controlling companies; fail to capture im-
Svendsen (1998) portant aspects or organizational performance; inadequate in an economy
where intangible assets and ongoing relationships between companies and
their stakeholders create value; dealing with the past
Kaplan and Norton Out of step with the skills and competencies companies are trying to master
(1992) today; did not fit with the engineering mentality of industrial age; can give
misleading signals for continuous improvement and innovation-activities in
today’s competitive environment demand
Atkinson, Waterhouse Ignorant of the claims of other stakeholders; lack the focus and robustness
and Wells (1997) needed for internal management and control
Chakravarthy (1986) Emphasis on the satisfaction of shareholders; scope for accounting manipu-
lation; undervaluation of assets
Eccles (1991) Better at measuring the consequences of yesterday’s decision than they are
at indicating tomorrow’s decision; provides no information on poor service
or deficient quality, for example, until these problems show up in the in-
come statement
Rhyne (1986) Capture only a portion of the firm’s effectiveness
Epstein and Manzoni Capture the impact of decisions with a significant time lag and tend to be
(1997) less proactive indicators of potential problems
Brignall and Bal- Failure to measure and monitor multiple dimensions of performance (be-
lantine (1996) cause organizational success also depends on how well the organization
adapts to the environment within which it exists)
Keasey, Moon and Masks the means by which the performance was achieved; can be manipu-
Duxbury (2000) lated to someone’s own interest
Ghalayani and Noble Have not incorporated strategy; try to quantify performance and other im-
(1996) provement efforts in financial terms; had the effect of setting norms rather
than motivating improvement
Eccles and Pyburn Financial indicators cannot provide much guidance for what must be done
(1992) differently; internal rather than external focus

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Appendix 2
Reasons to Consider the Changes in Performance Measurement

Author (s) The need for improved performance measurement

Waddock and Graves The complexity of strategic decision-making as the result of the impact of
(1997) different stakeholder expectations
Kaplan and Norton There is no single measure that can provide a clear performance target of
(1992) focus attention on the critical areas of the business; managers want a bal-
anced presentation of both financial and operational measures
Eccles (1991) The leading indicators of business performance cannot be found in finan-
cial data alone; pressure from efforts to generate measures of customer
satisfaction
Epstein and Manzoni There is no single performance indicator that can capture the full com-
(1997) plexity of an organization performance; the need to balance the focus on
other stakeholders
Atkinson, Waterhouse The need for business performance that specifies relationships between
and Wells (1997) the company and its various stakeholders
Chakravarthy (1986) The ability to measure satisfaction of all of the firm’s stakeholders is an
important discriminators of strategic performance
Berman, Wicks, Kotha Broadening the definition of performance may allow better understanding
and Jones (1999) the important links amongst stakeholder relationships, strategy and per-
formance
Waterhouse and The broader and more strategically performance measures and a system
Svendsen (1998) for integrating performance information into critical business decisions
and activities are required
Keasey, Moon and There is a need to evaluate performance across wide range of dimensions
Duxbury (2000)
Tatikonda and Tatik- Performance measures need to reflect the changes in competitiveness
onda (1998)
Banker, Hsi-Hui and The need for aggregate measures of performance that do not confound the
Majumdar (1996) impact of different strategic factors
Eccles and Pyburn The extension on traditional financial measures are needed in response to
(1992) changing markets, new strategies, and concerns about a “short-term orien-
tation”

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Appendix 3

Aspects to be considered in the Improved Performance Measurement

Author (s) Aspects to be considered

Kald and Nilsson Further improvement in performance measurement is important in such
areas as quality, reliability of delivery, lead times, and customer satisfac-
(2000) tions that are all required by all stakeholders in the company
Meyer and Gupta Multiple and disparate performance measures to accommodate diverse
(1994) interests among stakeholders
Kaplan and Norton The need of operational performance that are the drivers of future finan-
(1992) cial performance; measurement which links and balanced strategy and
operations
Keasey, Moon and Performance indicators that may prevent dysfunctional behavior such as
Duxbury (2000) manipulation of indicators according to personal interest
Epstein and Manzoni Performance indicators that are considered to be strategy’s key success
(1997) factors; Proactive to enable management monitor corporate progress
Tatikonda and Tatik- Should reflect the changes in competitiveness and balance short-term and
onda (1998) long-term measures, internal and external measures, financial and non-
financial measures
Waterhouse and Measurement indicators which are adequate in an economy where intan-
Svendsen (1998) gible assets and ongoing relationships between companies and stakehold-
ers creates value
Waddock and Graves Companies’ performances should measure up to a broader set of societal
(1997) expectations
Chakravarthy (1986) Indicators with the inclusion of transformation processes within the firm
and that consider the claims of stakeholders
Gaiss (1998) Performance indicators that enable people to communicate and provide
feedback on performance against objective
Atkinson, Waterhouse Performance measurement that can accommodate organizational learning
and Wells (1997) and gives a way to evaluate contribution of the company’s suppliers
Harrison and Freeman Refocusing performance measurement on a broad set of stakeholder rela-
(1999) tionships rather than a narrow set of purely economic relationship
Mcnair, Lynch and Measurement systems should be; strategic focus, systematically opti-
Cross (1990) mised, integrated and provides organization learning through group incen-
tives
Eccles and Pyburn Performance measurement systems should broadened to include quality,
(1992) customer satisfaction, innovation & similar results

198