Balanced Scorecard Linked to Shareholder Value: Making the Numbers Count

Abstract

Abstract The "balanced scorecard" (BSC), popularized by Kaplan and Norton, has become widely recognized both as a performance measuring vehicle and as a strategy communications tool. Typically, 20 to 25 measures (performance drivers and/or indicators) are chosen for the BSC—to align people, processes and investments with the company's strategy. New "dashboard" type software enables an attractive BSC presentation. Because of data accessibility, BSC measurements are almost universally historical or current data. More importantly than lag measures, what decision-makers need are forecasts. And credible forecasts are generated from a Monte Carlo simulation of the company, industry, and economic environment. The BSC process merges "management by objectives" with the "system dynamics" modeling approach. System dynamics offers the best process for enterprise modeling, yet this link is generally missing from BSC implementations. The stochastic company model is also the means for optimizing the asset and project portfolios and for tuning investment decision policy. Most corporate executives acknowledge that the sole or overarching objective is maximizing long-term shareholder value. This paper describes an approach for incorporating shareholder value and related key forecasts into the BSC. Share value is approximated by forecasting the company's free cash flow with the company model. Resolving the discount to get from expected monetary value to market capitalization presents some interesting issues. Share value is tracked and forecast, so people in the company can answer, "Are we creating or destroying shareholder value?"