Lec 13

Question 1

Problem of Financial KPI’s

Answer 1

Only considering financial output metrics are damaging for the business. Therefore, in order to assess the output, one should not only consider financial metrics

The reasons why financial metrics are unfavorable are the following:

• Measure of the past
• Do not tell, where the problem lies and what measures to take
• Stakeholders do not only have financial interest in the company but also social etc…

Question 2

Reminder of Pricipal-Agent Problem

Answer 2

Financial metrics can also lead to the Principal-Agent problem. This issue arises, when a principal employs an agent (E.g board of directors select managers). If one is focused only on financial metrics, people might only report those figures to the upper managers, that look good or in some cases or even twerk figures. This will eventually lead to a corrupt structure, since wrong measures will be taken or none at all. Upper managers will therefore not be aware of the issues that exist within the organisation (iceberg of ignorance). In order to mitigate this risk of Principal-agent problem, there should be some control mechanisms (e.g compliance mechanisms) employed that ensure transparency. This problem can further be limited with a culture of strong integrity and ethical correct behaviour.