by Ira Chaleff
Executive Excellence – September 2000
There is a disturbing trend in companies and government agencies. Increasingly, key statistics are manipulated and used to drive up the price of a company’s stock or the funding of government agency programs, instead of being used for their intended purpose.
Any operation needs to develop measurements. Measurements can’t substitute for the many observations and interactions good management makes, but they provide a shared sense of how things are going. The essential function of measurements is to help focus a company or program, monitor and analyze its successes or failures, and take actions that reinforce or remedy them as appropriate. This function has always been subject to distortion for the sake of image and rewards. Recently, this misuse of measurements appears to have worsened.
We have witnessed the consequences of placing excessive value on the literal act of “making the numbers.” In the corporate world, high-tech flyers distort accounting principles to make quarterly earnings look attractive to investors. Large fines have been levied for deceptive practices (e.g., counting promotional items as capital expenditures). The market has severely punished other deceptive practices once they are discovered, such as counting verbal agreements as hard revenue.
A CEO can put enormous pressure on divisional executives to make their numbers. Out of sheer fear, subordinates “game” the numbers to make them appear to have been met when they have not. This was a key factor in the dramatic demise of “Chainsaw” Al Dunlop at Sunbeam.
The phenomenon manifests itself perhaps even more destructively in the public sector. In the last year we have witnessed the scandal of teachers providing students with answers to standardized tests so their schools will rank favorably. Worse, we have seen police departments unwilling to take reports of crimes in their jurisdiction as these would jeopardize downtrending crime statistics! Behind these unethical acts are excessive pressure to “make the numbers” and reap the rewards that go with doing so.
It is now common practice for large accounting firms to be both the auditors of, and consultants to, their clients. This practice further weakens the restraints on playing fast and loose with numbers. It threatens the integrity of information on which investors rely. Either the accounting firms will reform themselves, or regulators will do it for them.
But a deeper management issue is at play here. The old saw “You get what you measure” has a lot of power. Management must always be thoughtful about what it measures and how such measurements reflect the underlying values and mission of the organization.
It is less appreciated that management must pay equally close attention to the quality of the reports it uses to track these measurements. Just as “the map is not the territory”, measurements are not the same thing as the actual products, relationships or events they measure. They can just as easily misrepresent, as represent, the actual conditions they are supposed to be alerting management to.
If management values “customer renewals” as a prime measurement, it needs to be very concerned if these trend downward, and equally curious about sudden upturns. In either case, intelligent management will explore the causes, and the resources for remedying or reinforcing them. Only then will it reward or correct those responsible for the underlying actions which contributed to the success or failure.
By contrast, poor management will simply reward or punish those associated with the numbers themselves. This has the dangerous effect of encouraging those responsible for the numbers to “make them” any way they can, regardless if they are fudged or fabricated. Because management obviously doesn’t care, as long as it can flash the numbers it wants to investors, the legislature or city hall.
Of course, the chickens eventually come home to roost and careers are broken, investments squandered, constituents betrayed and left more cynical than ever.
All of this presents a need for senior management to rethink what they reward and how they do so. They cannot expect to parachute in, hand out fat bonuses for “the highest ever quarterly sales figures,” and airlift back out. If this is all management does, it will generate padded figures. People become endlessly inventive about how to pad the figures when they have enough incentive to do so.
The steps management can embrace to make valid and constructive use of measurements include:
- Values: Clarify them, talk them, walk them. At staff retreats, explore performance situations which would test adherence to these values. Flush out contradictions and mixed messages.
- Constellations of measurements: Require several measurements for each key function which balance quantity with quality, short-term with long-term results, shareholder with stakeholder value. Tracking only one measurement or giving it undue weight, often introduces a distortion into the system.
- Rewards: Avoid linking excessive rewards (or penalties) directly to measurements. Link rewards to excellence in creating the underlying conditions that contribute to a measurable improvement.
- Head out of the sand: Good managers know intuitively when things don’t add up. If the reported numbers “smell,” don’t ignore or avoid them. Dig around and find why there is an inconsistency between the numbers and other indicators.
- Systems answers: If numbers prove to be fudged, you may need to make an example of the offender to show you value honesty above “performance.” But don’t stop there. Examine the system, including your own style and policies, to determine how it may pressure individuals to game it.
- Accountability: If your people fudge numbers to look good, accept accountability whether you condoned the specific deceptive practice or not. Leaders set the ethical tone and cannot duck responsibility for doing so.
- Industrious enquiry: When important measurements are declining, don’t harangue others to improve the numbers. Use appropriate analytic tools to discover the root causes. Then you can push all out for effective responses to those causes.
To use measurements well, you need to value your reputation for integrity above your reputation for performance. No one likes to perform poorly but you can live through and learn from performance failures. It is not so easy to recover your good name once it is tarnished. Make sure yours isn’t tarnished in the effort to “drive up the numbers.”
© Ira Chaleff 2004