Part 3: Performance targets and other measures

3.1
In this Part, we:

• discuss the importance of performance targets and other measures in statements of corporate intent; and
• present our findings relating to the performance targets and other measures in the statements we examined.

The role of performance targets in statements of corporate intent

3.2
One of the most important roles of a statement of corporate intent as a public accountability document is to provide performance objectives and targets. These enable shareholders and the public to learn how a public entity intends to measure the achievement of its stated objectives. Achievement against performance targets can then be reported in annual reports and other accountability documents (for example, half-yearly reports to shareholders), and used to assess how well an entity meets its objectives.

3.3
All of the entity types we examined are required to provide performance targets, and other measures by which their performance can be assessed in relation to stated objectives, in their statement of corporate intent or statement of intent.

3.4
In our view, the range of performance targets and measures should be wide enough to enable a full assessment of an entity's activities. Therefore, nonfi nancial targets and measures should be used as well as financial ones. In addition, performance targets should be measurable, with their meaning and relevance easily understood by the readers of a statement of corporate intent. Finally, performance targets and measures should clearly link to the stated objectives of an entity.

3.5
We assessed all the statements we examined against these expectations.

Our findings about the use and quality of performance targets

Using a range of performance targets

3.6
Most of the statements we examined (81%) presented a range of performance targets and measures, including a mix of financial and non-financial ones (see Figure 4).

Figure 5
Range of financial and non-financial performance targets in our sample of statements of corporate intent

* Only financial targets were presented, or non-financial targets were vague or difficult to assess.

3.7
All the statements of corporate intent in our sample that were produced by Crown Research Institutes and energy companies, and most of those produced by Stateowned enterprises, presented a wide range of financial and non-financial targets and measures against which the entity's performance could be assessed. For example, Crown Research Institutes routinely presented performance measures covering the full range of their activities, including measures for financial performance, research output, being a good employer, and customer satisfaction.

3.8
Where we found only a narrow range of performance targets (including among some council-controlled organisations and a couple of port companies), this was usually because only a few financial targets were set out. For one council controlled trading organisation, the only performance target given in its statement of intent was to achieve a specified profit level.

Using measurable performance targets

3.9
Only two-thirds of the statements that we examined included quantifiable and measurable performance targets (see Figure 5).

Figure 5
Measurable performance targets in our sample of statements of corporate intent

* Some of the performance targets (normally financial) had specified targets but others did not.

3.10
Many of the statements that did not include measurable performance targets simply listed a number of financial variables, without specifying the target. For example, one entity stated that a couple of its financial targets would aim to be within an "agreed budget", but included no information for readers about what the budget was or might be.

3.11
In several other cases, we found non-financial information presented in such a way that a reader would not be able to later assess whether the targets had been achieved. For example, an entity gave as a performance target:

To undertake an appropriate level of sponsorship.

3.12
In the above example, the entity did not define what an "appropriate level" of sponsorship was. We found several other similar cases where the performance targets provided were actually objectives. For example, a couple of entities stated as performance targets that they would deliver, or put in place, business plans. In another case, a council-controlled organisation (an economic development agency) set a performance target for its region to grow faster than the national economy. As well as being an objective or vision, rather than a performance target, achieving this goal was largely outside the direct influence of the entity.

Using understandable performance targets

3.13
We examined whether the performance targets given in our sample of statements of corporate intent and statements of intent were easy to understand, with any technical terms or measures explained. More than half the statements we examined (30 out of 54) used targets that were either easy to understand or had definitions for any technical measures (see Figure 6).

Figure 6
Extent to which performance targets given in our sample of statements of corporate intent were easy to understand

* Explanations or definitions were given for some but not all of the technical terms or targets.

3.14
However, for the rest of the statements in our sample, only some of the performance targets were likely to be easily understood without specialist knowledge, or the entity did not explain the technical terms. Often, financial measures were presented in abbreviated form or without explanations of their meaning or relevance – for example, EBITDA¹ and Acid Test². In our view, readers without some financial or accounting knowledge would be unlikely to understand these measures.

3.15
The tendency to abbreviate financial measures was more pronounced in statements of intent than in the corresponding annual reports. The annual reports were more likely to express financial measures in full and in plain language.

3.16
In some cases, the performance measures were so vague that we could not understand their meaning or significance as targets. For example, two council-controlled organisations simply stated as performance targets: "add value", "cashflows", or "balance sheet".

3.17
Many of the entities in our sample are involved in technical activities (for example, energy companies and council-controlled organisations involved in utility or infrastructure businesses). They therefore use technical performance targets. We identified several instances where the lack of explanation of these technical targets made their meaning or significance difficult to understand. For example, energy companies typically and justifiably use several measures relating to interruptions to electricity supply as performance targets. Some of the companies in our sample clearly defined these targets, while others stated them as abbreviated technical terms that are unlikely to be readily understood by all readers.

Linking performance targets to stated objectives

3.18
To be effective, performance targets should be clearly related to an entity's stated objectives. The link between targets and objectives is a legislative requirement for all the types of entity that we included in our sample. We examined how clearly performance targets in the statements of intent were linked to the entity's objectives (see Figure 7).

Figure 7
Linking performance targets to stated entity objectives in our sample of statements of corporate intent

* Clear link: It was easy to see how the performance targets addressed all of the entity's stated objectives.
Some links: Performance targets covered some but not all of the entity's stated objectives.
No links: It was unclear how performance targets addressed any of the entity's stated objectives.

3.19
A little more than one-third (19 out of 54) of the statements that we examined had performance targets that addressed all of the entity's stated objectives. For the remainder, most linked only some performance targets to objectives, while three council-controlled organisations did not link performance targets to their objectives at all in their statements of intent.

3.20
In the good examples of linking of performance targets in statements of corporate intent – including all Crown Research Institutes in our sample – all objectives were clearly covered by a range of both financial and non-financial performance targets. In these cases, it was easy to see how the entity would measure whether it was achieving its objectives during the three years covered by the statement.

3.21
In several cases, the use of performance targets or other measures to assess how entities intended to meet their objectives was weak or non-existent. For example, council-controlled organisations, council-controlled trading organisations, and State-owned enterprises are all required under their governing legislation to be good employers and to exhibit a sense of social responsibility.³ However, we found several instances among these entity types where these objectives were not covered by performance targets or other measures.

Guidance on preparing performance targets

3.22
The Treasury and State Services Commission have produced some useful guidance for setting medium-term performance measures.⁴ Although the guidance is directed specifically at government departments and their production of statements of intent, it can also assist other public entities with setting their performance targets in statements of corporate intent.

1: Earnings before interest, taxes, depreciation, and amortisation.

2: Also known as the Quick Ratio – the ratio of cash and readily realisable assets to current liabilities.

3: These are also legislative requirements for Crown Research Institutes, but all the Crown Research Institutes in our sample linked performance targets to these objectives.

4: See, for example: State Services Commission and the Treasury (2007), Performance Information Measures and Standards in the SOI and Annual Report, State Services Commission, Wellington; and State Services Commission and the Treasury (2007), Guidance and Requirements for Departments – Preparing the Statement of Intent, State Services Commission, Wellington.