How should companies measure performance? Corporate boards and shareholders have grappled with the issue for years. But amid the current turmoil, the debate has been given a new urgency: banks that appeared to be performing well in recent years are now suffering losses as risky strategies go sour. Executives facing new challenges – high oil prices, resurgent inflation, economic slowdown – are finding that past measures may not be suitable for the new environment.
For shareholders, the issue is critical. They rely on board directors to monitor performance. The incentives a board sets for the executive team are therefore crucial. In recent years, a consensus has emerged on the use of total returns to shareholders as the best way to measure performance.
