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Reassessing measures of sustainable firm performance: A consultant's guide to identifying hidden costs in corporate disclosures

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  • William L. Smith
  • Yue Cai Hillon
  • Yanni Liang

Abstract

Strategy, management, corporate social responsibility, critical accounting, and other business researchers frequently utilize financial metrics such as return on assets, return on equity, and return on sales as proxy measures for the financial performance of firms. Large data sets offer convenience but exclude the textual data of corporate disclosures that offers critical insight into specific executive actions and social and environmental outcomes. This study looks at the detrimental consequences of the prevalent practice of relying on macrofinancial metrics as measures of firm performance. Insight from the socioeconomic approach to management (SEAM) is then applied to help an external analyst develop the perspective of an internal consultant to identify hidden costs in corporate disclosures. An extensive case on former CEO Robert Nardelli's tenure at Home Depot is presented as an example of applied SEAM theory to explore how a causal network of dysfunctions can be traced through publicly available financial disclosures. The management discussion and analysis as well as the executive incentive compensation formulas serve as a roadmap to discover hidden costs. The study offers a critical perspective of financial disclosures to allow researchers to externally diagnose dysfunctions sooner rather than years later, an insight formerly only available to internal consultants.

Suggested Citation

  • William L. Smith & Yue Cai Hillon & Yanni Liang, 2019. "Reassessing measures of sustainable firm performance: A consultant's guide to identifying hidden costs in corporate disclosures," Business Strategy and the Environment, Wiley Blackwell, vol. 28(2), pages 353-365, February.
    • Handle: RePEc:bla:bstrat:v:28:y:2019:i:2:p:353-365
    DOI: 10.1002/bse.2254
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