Chapter 1

The Accountability Advantage

In the spring of 1989, Ed Woolard, then chairman of DuPont, gave two speeches that would help him make his mark as a maverick. The then-freshly minted DuPont chief executive declared that, among other goals, DuPont would cut toxic air emissions by 60 percent, carcinogens by 90 percent, and hazardous waste by 35 percent.

Woolard stood at the podium and made gargantuan commitments without knowing exactly how the company, the biggest U.S. polluter, could comply. "My people told me I couldn't do that!" he later recalled. "I said, 'Well, I've done it, done it publicly. Now you guys have to do it -- it's your job!'"

At the time of the incident, many people inside DuPont would maintain that Ed Woolard had lost his management sense. With the benefit of hindsight, however, they would unanimously say the reverse: He had brought new sense to management.

Woolard was choosing public accountability -- naming targets and promising to report on progress publicly -- in a stunning drive to boost company performance. It worked wonders. By the time he retired as chairman eight years later, in 1997, DuPont had cut toxic air emissions by 60 percent, carcinogens by 75 percent, and hazardous waste by 46 percent -- all documented quantitatively in an annual environmental report.

In the annals of management, the most remarkable move by Woolard was not that he set a new course on the environment -- although that was noteworthy -- but how he set it. "The first thing we did," he explains, was to declare that "we're going to measure everything, and we're going to make public commitments."

Woolard followed up, too. He called upon DuPont's thirty-three highest-level managers to sign "The DuPont Commitment." The document obliged every executive to drive his or her operations toward zero waste generation, zero emissions, and zero accidents. The single page ended with the pledge: "We will measure and regularly report to the public our global progress in meeting this commitment."

Few managers fully understand the notion of accountability. They can't define the concept clearly. Nor can they readily apply it to gain day-to-day or long-term advantage. However, developing full accountability can give an organization a powerful competitive edge in implementing strategy and in helping individuals, teams, and business units deliver unparalleled performance.

Unfortunately, most people interpret accountability as a code word for organizational policing. The concept evokes the image of a higher authority, stern-faced, banging the table for an explanation -- while the culpable party, lips pursed, gets squeezed uncomfortably to come clean. When people embrace the notion of accountability, they often do so for the wrong reason -- for the satisfaction of making the other guy accountable.

However, this menacing, autocratic form of accountability contrasts with an appealing, empowering variety. Rather than act as a stick to keep people in line, the principles of accountability can act as a carrot to keep them climbing to higher levels of performance. The greatest beneficiary of accountability need not be some higher authority, an outsider, or a special-interest group. It can be the organization itself, propelled by goals set by leaders like DuPont's Woolard.

It is time to revise the meaning and use of the concept of accountability. To realize its potential, managers must turn its reputation around. They must throw out the bad cop and bring in the good one. They must use accountability as would an inspiring, if demanding, teacher, to rally people to fulfill lofty ambitions.

Because the word accountability appears in many contexts -- business, law, morality, government, politics -- few people agree on its meaning. However, the true test of an accountable organization is specific: whether it measures performance quantitatively -- with financial and nonfinancial numbers -- and reports it publicly to audiences inside and outside the organization. Anything less than hard numbers, broadly disclosed, reveals an organization hesitant to commit to full accountability. The act of one party answering to another in qualitative terms alone is not enough. Accountability requires data. As Charles Handy says, "Counting makes it visible, and counting makes it count."

Indeed, the late Coca-Cola Chief Executive Roberto Goizueta repeatedly declared shareholder value his objective, so he measured and reported the closest quantitative proxy he knew for showing his company was accountable for building that value -- economic profit.

Tenneco Chief Executive Dana Mead has repeatedly declared cost and quality his objective, so he has measured and annually reports the single most pertinent figure that shows the company is succeeding: reductions in failure costs (the sum of scrap, rework, warranty, litigation, and other costs).

Skandia Chief Executive Lars-Eric Petersson declares developing customer relationships a prime objective, so Skandia's multiple insurance units report satisfied customer indexes, insurance-policy surrender ratios, and other hard-edged numbers.

Former Allstate Chief Executive Jerry Choate declared equal employment opportunity a prime objective, so Allstate publishes race and gender data, by job category, as reported to the Equal Employment Opportunity Commission.

Executives like these recognize that traditional practices for measuring, managing, and accounting for performance are no longer enough. They find accounting according to generally accepted accounting principles (GAAP) awkward and outmoded, hardly up to helping managers compete effectively in global capital, labor, and product markets. They recognize what leading thinkers like Michael Porter have maintained for years. Individual companies cannot operate at peak performance, nor can the economy as a whole effectively allocate capital, without an overhaul of accounting.

In a landmark report in late 1995, Porter and Robert Denham urged the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board "to undertake a project to develop generally accepted principles for measuring salient categories of nonfinancial information." They cited such categories as customer satisfaction, process quality, and work-force training. To achieve record-breaking performance, companies must retool their management and accounting systems.

What managers will find is that new forms of measurement have tremendous power to enlighten and empower decision making internally. That's where the magic of accountability starts. These measurements also give the accountable company an entirely new advantage: the ability to enlighten decision making with the insights of outside stakeholders. That's where the concept of accountability explodes with new possibilities -- in enabling the company to win advantage by inspiring loyalty in all stakeholders vital to corporate interests. This one-two punch-first -- measuring, managing, and reporting performance internally; and, second, presenting the numbers externally -- promises corporations a new competitive advantage.

This book explores how companies can gain this advantage. First, it offers an inside look into how leading managers have embraced the practices of accountable management. Second, it shows how companies have used accountable management as a springboard to better performance. Drawing on the best practices of these companies, we portray a composite view of the accountable organization -- along with a model of that organization, an approach to building it, and the tools for realizing its potential.

THE ACCOUNTABLE PERFORMANCE

The job of building the accountable organization, in spite of the focus on data, is not first or foremost a task of accounting -- even if accounting numbers are the lingua franca of accountability. It is a task of management. In the same way that a critically acclaimed theatrical production calls for a well-wrought script, a cast of skillful characters, and plenty of direction and support backstage, the accountable organization calls for a set of rigorous practices; strong leadership; and robust management, accounting, and information systems to support them. The final show -- the accounting of performance -- represents untold discipline behind the scenes, starting with the dedication of general managers, financial executives, and top operations managers to adopting the full complement of practices that typify the accountable organization.

Most companies today have only begun to fit together all the pieces of a critically acclaimed show of accountability. However, across industry, companies have created a remarkable buzz of activity. In the first half of this book, we chronicle that buzz. To be sure, we find that no single company today operates with every element of accountability. Still, many companies are crafting masterful one-act dramas that fit into the larger accountability play. In the second half of the book, we show how all companies can bring together the pieces -- the best practices -- in a single model to create a production of an accountability masterpiece.

Our research, based on hundreds of interviews with company managers, our own extensive studies and surveys over twenty-five years, and a review of the vast academic and managerial literature, shows that, as managers create the buzz of activity, they plunge deeply into four different approaches to accountability: governance, measurement, management systems, and performance reporting. Managers create active, independent governance; balanced financial and nonfinancial systems of measurement; integrated, closed-loop planning, budgeting, and feedback systems; and thorough, regular public reporting procedures. A combination of these four approaches defines what we call the accountable organization.

This combination of efforts is daunting, but our research shows that managers, collectively, have begun to define accountability in just this way. They are looking at the notion much more broadly than in the past. They have jumped beyond accountability as a splinter issue, like paying for performance. They have fashioned inventive solutions to using accountability as a tool for delivering on the promise of the wealth and well-being that can flow from the free-enterprise system. This creates a rich story of accountability never before told. We bring it to life by weaving together the four elements of accountability.

Governance. Who could have missed the most prominent effort today by top managers to address a vacuum of accountability: revamping governance by the board of directors? Managers now roundly concede that traditional governance mechanisms have fallen short of their target of institutionalizing firm, independent oversight that holds management's feet to the performance fire. Recent innovations to improve board governance, although not fully assuaging investors' concerns, are perhaps the most polished act today in the new play for full accountability.

General Motors (GM), for example, rewrote the role of the board of directors after its stumbling performance in the early 1990s. The company so thoroughly recast its governance principles that a commission led by governance expert Ira Millstein cited GM as a model. Among other things, GM requires that the board contain a majority of independent directors, that directors themselves nominate new directors, that a committee annually assess the performance of the board, and that outside directors select a lead director to chair regularly scheduled meetings of outside directors.

Measurement. Managers have struggled for decades with financial and managerial accounting that fails to measure all the variables that drive long-term value. Without taking into account quality, turnaround time, customer satisfaction, and other leading indicators of company wealth creation, managers at all levels have simply made bad decisions. Leading managers have attacked the issue of accountability by inventing many new ways to measure financial, operational, and social performance.

What Peter Drucker said in his classic editorial in 1993 is as true today as ever: "Financial accounting, balance sheets, profit-and-loss statements, allocating of costs, etc., are an x-ray of the enterprise's skeleton. But much as the diseases we most commonly die from -- heart disease, cancer, Parkinson's -- do not show up in a skeletal x-ray, a loss of market standing or a failure to innovate do not register in the accountant's figures until the damage is done."

Companies are rapidly devising ways to go beyond the x-ray and create much more insightful leading indicators for making decisions and creating value. Arthur Andersen developed a number of key measures for gauging its performance worldwide. Along with financial indicators, the firm measures such factors as customer satisfaction, flexibility, resilience, market share, and employee satisfaction.

Managers have realized that, paradoxically, the best way to stimulate peak financial performance is often not to spotlight the financials at all. A menu of nonfinancials, to complement the financials, can make just about everyone better able to contribute to the ultimate financial health of the company. Clamping managers in the irons of financial targets may actually dull peak performance.

New balanced measurement systems like the ones at Arthur Andersen and Sweden's largest bank, Swedbank, show the future. Swedbank's branches deliver a report card of performance that shows measures of "customer value added" (for example, depth of relationships, loyalty), "people value added" (perception of leadership, perception of competence), and "economic value added" (profit before credit losses, bad debt ratio).

Management Systems. Try as they might, managers have always had trouble linking the systems for corporate strategic planning, business-unit planning, annual budgeting, performance review, and compensation. The systems often have worked at odds with each other. Managers today are trying to make them work as one. The objective is to make the measures defining strategy at the top lead to actual implementation of that strategy at the bottom.

Robert Kaplan and David Norton, in a 1996 study with CFO magazine, found 57 percent of respondents reporting only "little" or "some" linkage between the priorities of the long-range strategy and the annual budget. More than two-thirds (69 percent) said that strategic planning had only "some," "little," or "no" influence on the company's overall success.

Senior managers are starting to forge links between isolated pieces of their management systems. They are breaking down top-level measures into subordinate measures for division and team performance. They are asking managers to determine the indicators of success -- the drivers of long-term value. The measures, then devised by the people accountable for them, gain buy-in. People take ownership for them and the measures keep people focused on the strategies, objectives, tactics, and targets for which they are accountable.

As Kaplan says of frontline workers, armed with measures they understand: "You transform them into people who really deliver the strategy day to day."

Top managers are finding that measures also offer a way to evaluate the strategy itself. Are customers satisfied, say, with the new-product strategy? A proxy for that level of satisfaction is whether they are clogging phone lines with help calls. Are shareholders satisfied with their financial returns? A simple measure is the percentage by which stock-price gains exceed those of the firm's peer group. Are employees going to remain satisfied? One measure is whether, according to surveys, the brain trust of key people in research and development say they are happy -- and not inclined to walk. A mix of new and traditional measures gives hard, cold, diagnostic data for evidence. Managers no longer need rely only on end-of-quarter financial numbers, which yield a flow of insight that runs only ankle deep.

Reporting. Finally, managers have begun to push the envelope where chief financial officers often cringe, in reporting data more broadly, both within the company and outside. In an age when most workers inside the company depend on information to innovate, many managers have come to believe the company holds information too tightly for rapid decision making. Hence comes the popularity of "open-book management," in which managers share detailed cost figures with every employee.

However, managers are not stopping with broader reporting inside the company. At a time when company outsiders have more choices than ever to invest their capital, serve an employer, conduct a partnership, and buy products and services, many managers are offering more information to sway decisions in the firm's favor. Managers are concluding that they have no compelling reason to operate with so much performance data hidden backstage. Executives in every function are taking a fresh look at what information they need to run the company. They are providing insights to accountants to help them provide that information, and are drafting plans to disseminate a distillation of that information to people inside and outside the company.

In short, executives have begun to develop corporate communications strategies based on increased transparency. Along with a narrative that tells the story of their corporate strategy, executives are giving more hard data, and hard-hitting descriptive information, to woo shareholders, (prospective) employees, business partners, and customers. What is the payoff? Engaging the collective efforts of all stakeholders -- who have a new window on corporate performance -- in a never-ending effort to generate ideas and spark innovations to better the business.

The notion of broadly reporting performance numbers publicly is not new. Philosopher Jeremy Bentham, John Stewart Mill's teacher, recognized 200 years ago the power of public accountability. He wrote about the "open-management principle," "all-above-board principle," and "transparent-management principle." Publicity, Bentham maintained, commits companies to their duties. "The more strictly we are watched, the better we behave," he wrote.

Bentham, the founder of Utilitarianism, foresaw as far back as the eighteenth century the power that managers like Ed Woolard exercise today: using a public commitment and accounting spurs unparalleled betterment inside the company. The combination of indisputable quantitative figures, along with public disclosure, keeps people focused on their goals.

Of course, managers aren't going public with secrets that hurt competitiveness, but a growing number are realizing that the line separating confidential and public information has shifted sharply. Although on-time shipping performance may have fallen squarely within the domain of proprietary data a decade ago, today it may fall into the domain of numbers that, reported publicly, give the company an advantage.

In any case, the flow of information within society and among business has exploded to such a degree that it calls into question any strategy based on knee-jerk confidentiality. In years past, companies (and managers) could reliably gain an advantage by withholding information or selectively releasing it. They could err on the side of stamping every memo "company confidential." That advantage has turned into a disadvantage, however, as managers on top of the pyramid can no longer easily control the information, like product quality, that reaches the marketplace.

Those managers striving to apply accountability as a tool for high performance are working on all four fronts -- governance, measurement, management systems, and reporting -- as described in Chapters 3, 4, 5, and 6. However, the company that puts all four of these elements together into a single, broader concept of accountability, as described in Chapters 7, 8, 9, and 10, will stage an unbeatable accountable performance. Top managers at some companies are starting to put this model together. They are winning an audience of investors, customers, employees, business partners, suppliers, and even the public. They are positioning themselves to use accountability's power to spark glittering performances by individuals, teams, business units, and their entire companies....

"The first thing we did was to declare that we're going to measure everything, and we're going to make public commitments."

"Counting makes it visible, and counting makes it count."

Managers are attacking four elements of accountability: governance, measurement, management systems, and performance reporting.

The best way to stimulate peak financial performance is to combine financial measures with nonfinancial ones.

Developing full accountability can give an organization a powerful competitive edge.

The payoff comes from engaging all stakeholders in a never-ending effort to generate ideas and spark innovations to better the business.

The "open-management principle," "all-above-board principle," and "transparent- management principle" drive companies toward ever higher performance