In order to render a truly accurate picture of your company’s performance to shareholders, you need to exhaustively test and collate your Key Performance Indicators (KPIs).
When it comes to corporate reporting, it pays to keep things clear and simple.
It’s easy for IROs to bombard their shareholders with endless reports, each packed with high-level statistics and detailed performance measurables. But not all investors (retail investors in particular) are going to be able to appreciate that level of granularity — they likely won’t even read them, let alone understand them. Instead, your shareholders are better kept in the know with easily digestible, quickly recognizable markers of a company’s performance and progress.
Investopedia defines Key Performance Indicators (KPIs) as “a set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals.” Integrating KPIs into the reporting process shouldn’t be difficult — after all, every company should operate with tangible goals in mind, both in the short and long term. What is challenging, though, is avoiding redundancy or outright irrelevance with your KPIs, so that, when put together, the big picture they create is truly representative.
Which KPIs Are the Best?
Selecting the right KPIs takes a lot more effort than blindly setting a revenue target at the start of a quarter. While the best KPIs are aligned with a company’s goals, they must take business strategy and industry conditions into account as well. Take, for example, the scenario Intuit VP of IR, Financial Planning, and Analysis, Matt Rhodes, shared with IR Update:
We offered a number of new KPIs when we decided to make a big change in how we sell many of our products, moving from a shrink-wrapped software model to an online subscription model. The change initially results in lower sales prices and lower revenue, which can be concerning to investors. But we know it will result in faster revenue growth, lower customer acquisition costs, and the ability to expand sales globally. So we’ve given investors the performance indicators they need to understand how the strategy will lead to greater rewards over time.
Clearly, this type of optimized strategy shouldn’t be saved only for major paradigm shifts within the business model or other special circumstances. The best KPIs are the ones that cast a wide net around the company’s operations as a whole, in current market conditions, while distilling the most important information into a few trackable indicators.
Keeping Things Clear
As with any other IR initiative, IROs should make transparency a big priority in their search for the right KPIs. “We have principles that help us to decide which KPIs to share with our investors,” Rhodes elaborated. “One is that we want to offer transparency. Another is that we want our external description of the business to mirror how we view and manage the business internally.”
All this is to say that a good presentation doesn’t leave the less promising parts muddled in statistics — it clearly communicates both the opportunities and the challenges faced by the business. “To truly understand the company, it’s important to have not only top and bottom line guidance, but also a clear description of the KPIs that drive the growth and success of the business,” Brent Thill, managing director of UBS, told IR Update.
That said, selecting transparent, relevant KPIs accomplishes nothing if you don’t use the proper means to communicate them to shareholders — the ways that investors engage with the information can be just as crucial to understanding the information itself. Since KPIs are typically based on broad parameters and publicly available information, they should be prominent in all investor materials and placed front and center on the company’s corporate website, according to Corporate Eye, not buried on the back page of an investor report.
What’s more, KPIs are tailormade for the modern IR world of social media and active investor engagement. Using corporate social media accounts to share progress between more formal reports (when permissible) provides a new level of value to investors, as SEC explains. Even more directly, a company-specific IR mobile app can send updates directly to investors’ smartphones, keeping them updated and engaged with the company’s progress and success within minutes of each development.
At the end of the day, KPIs really make things easier for everyone — IROs have an established framework with which to focus their reporting, while corporate board members and investors have a clear and, most importantly, an accurate sense of performance. How well do they work when applied correctly? Just take the word of UBS’ Thrill, who told IR Update, “I can’t imagine not having such a framework for my companies.”
(Main image credit: focus on apature/flickr)