Ch.7 Value Measurement

Question 1

causal claim

Answer 1

any assertion that invokes causal relationships between variables, for ex- ample, that a drug has a certain effect on preventing a disease.

Question 2

Causal inference

Answer 2

involves drawing a connection between two states of affairs and inferring that one caused the other.

Question 3

causal claim extra info

Answer 3

One problem is that an event may have a number of causes that together bring it. Another issue is that an event might have causes that can bring it about separately on different occasions.

The problem is that causal connections can be very complicated, and figuring them out can be difficult.

Finally, an event might have countervailing causes—causes that prevent the effect from occurring. For instance, smoking can cause cancer, but it does not cause it necessarily because individuals might be doing other things (exercise?) that reduce the impact from tobacco. Therefore, not every smoker develops cancer.

Question 4

Correlation is not a guarantee of a causal connection.

Answer 4

Correlation is not a guarantee of a causal connection.

Question 5

to establish a causal connection

Answer 5

you need to establish if there is co-variation between the vents—if A event happens then the B event happens, and if A event does not happen, the B event does not happen.

Question 6

One can determine co-variation through

Answer 6

experimentations where all variables are controlled (held constant), allowing variation only for the alleged cause and effect.

Question 7

Temporal priority

Answer 7

event A (the alleged cause) always precedes event B (the alleged effect).

Question 8

Covariance

Answer 8

The two events must vary together; as one varies (e.g. increases or decreases), the other also varies (increases or decreases).

Question 9

Assessing Causal Arguments

Answer 9

Temporal Priority

Covariance

A reasonable mechanism should be conceivable that enables the causal relation between two events.

Have other possible causes been ruled out?

Question 10

Accounting

Answer 10

Accounting is the measurement, processing and communication of financial information about economic entities.

Question 11

Accounting includes the following fields:

Answer 11

1. Financial accounting
   summary, analysis and reporting of financial transactions;
2. Management accounting
   use of accounting information to make better management decisions;
3. Auditing
   independent examination of an organizations account’s;
4. Tax
   accounting for tax purposes.

Question 12

Financial reporting

Answer 12

Financial statements:

Balance sheet:

- Statement of financial position at a given point in time - Reports: -  Assets: Economic resources (Things of value) -  Liabilities: Economic obligations (Things owed) -  Ownership equity: Residual value after liabilities are paid

2. Income statement:
   Statement of income, expenses, and profits over a given period
3. Cash flow statement:
   Reports on cash flow activities, particularly operating, investing, financing activities

Question 13

The Big Four

Answer 13

Four largest international audit firms

Deloitte
PwC
EY
KPMG

Question 14

Finance

Answer 14

is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty.

A key point in finance is the time value of money, which states that purchasing power of one unit of currency can vary over time. Finance aims to price assets based on their risk level and their expected rate of return.

Question 15

Finance sub-categories:

Answer 15

Public finance: Addresses the role of government in the economy

Corporate finance: Funding and capital structure of corporations Investment banking

Personal finance: Financial management for individuals and families (a specialty within SAS!)

Question 16

Global financial system

Answer 16

International financial institutions:
International Monetary Fund
Came out of the Bretton Woods Conference following WWII
Promotes global monetary cooperation and financial stability

World Bank
An international financial institution of the United Nations
Provides loans to developing countries

Governments:
Regulatory agencies
Sets the rules for the ‘players’ in the financial system
USA: (U.S. Securities and Exchange Commission (SEC); Federal Reserve System (“Fed)
Canada: Office of the Superintendent of Financial Institutions (OSFI)

Central Banks
Manages a state’s currency, money supply, interest rates
Operates at arms length from government

Banks:
Retail banks: General full-service banking services for individuals and businesses

Investment banks: Help clients raise financial capital by underwriting or acting as the client’s agent in the issuance of securities (or both). Securities = tradable financial asset (stocks, bonds, derivatives, etc.)

Stock markets:
Exchanges where stocks are bought/sold
NYSE; NASDAQ; TSX; etc.

Question 17

Kaplan and Norton

Answer 17

recognize the limitations of financial measures but argue against the recent trend to abandon financial measures in favour of operational measures. They argue for a balanced approach.

Based on a year long research with 12 leading companies, Kaplan and Norton developed a scorecard to provide managers with a balanced yet comprehensive view of the business.

Kaplan and Norton argue that traditional measurement system has control bias: managers set objectives and measured to see if employees took action. Instead, the balanced scorecard replaces control with strategy, enabling all employees to act towards the overall strategic vision.

Question 18

The Balanced Scorecard

Answer 18

The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization’s innovation and improvement activities–operational measures that are the drivers of future financial performance.

Scorecard provides financial measures on action taken.

It provides operational measures on customer satisfaction, internal processes, and innovation activities

The scorecard minimizes informational overload.

The operational measures are drivers of future financial performance.

It allows mangers to locate the source of improvements and to see if some improvements were made at the cost of another.

Question 19

The Balanced Scorecard Links Performance Measures

Answer 19

1. How do customers see us? (customer perspective)
   ->
2. What must we excel at? (internal perspective)
   The balanced scorecard allows managers to look at the business from four important perspectives. It provides answers to four basic questions:

->
3. Can we continue to improve and create value? (innovation and learning perspective)
->
4. How do we look to shareholders? (financial perspective)

Question 20

Customer Perspective

Answer 20

Companies must translate their customer oriented mission statements into concrete goals and measures of what matters to customers (time, quality, performance/service, and cost).

Companies determine goals for time, quality, performance, and cost, and translate them into concrete measures.

Companies can also benefit from obtaining data on customer expectations from external sources (customers)

Question 21

Internal Business Perspective

Answer 21

The internal perspective focuses on processes that drive customer satisfaction as well as core competencies necessary for market leadership. To achieve goals in these areas, managers must connect them to measures of employee action at local levels.

should stem from the business processes that have the greatest impact on customer satisfaction-factors that affect cycle time, quality, employee skills, and productivity, for example.

Companies should also attempt to identify and measure their company’s core competencies,
To achieve goals on cycle time, quality, productivity, and cost, managers must devise measures that are influenced by employees’

Question 22

Innovation and Learning Perspective

Answer 22

Due to intense global competition, companies must constantly monitor its ability to introduce new products and capabilities as well as make continual improvements to its existing products and processes.

Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities.

A company’s ability to innovate, improve, and learn ties directly to the company’s value. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins – in short, grow and thereby increase shareholder value.

Question 23

Financial Perspective

Answer 23

Some criticize financial measures for backward looking focus, arguing that companies should focus on operations, which will determine financial success.

The problem is that sometimes operational improvements do not translate into financial improvements due, for example, to bottlenecks elsewhere. One needs financial measures to alert executives to such problems.

Financial measures also necessary to ensure that strategy on goals and measures is successful (leads to increased value). Ideally, companies should specify how operational goals and measure connect to financial goals.

Question 24

ESG

Answer 24

Environmental social and governance

Question 25

ESG Is oversold?

Answer 25

What was hoped:

1. Individual companies’ social, environmental, and governance (ESG) performance would improve (because what gets measured gets managed).
2. A link tying companies with better sustainability records to better equity returns would emerge.
3. Investors and consumers would reward companies with strong sustainability performance—and put pressure on those that lagged.
4. Ways to measure social and environmental impact would become more rigorous, accurate, and widely accepted

Over time, this virtuous cycle would result in a more sustainable form of capitalism.

Sure. socially responsible investment has grown to more than $30 trillion—one-third of all professionally managed assets. BUT

During this same 20-year period carbon emissions have continued to rise, and environmental damage has accelerated. (Social inequity, too, is increasing. the gap between median CEO compensation and median worker pay has widened
nonstandard, incomplete, imprecise, and misleading. Greenwashing.

Question 26

ESG Is oversold?… Problems in reporting

Answer 26

Problems reporting:

Lack of mandates and auditing.
Discretion over what information to include in their sustainability reports.
Little third-party validation (input data is misleading and incomplete).

Specious targets: most companies set goals based on their capabilities or aspirations not taking into accounts limits of development (not constraining).

Complexity: Complete picture of its carbon footprint requires to measure three types of emissions: those produced and controlled by its own facilities (classified as scope 1); those associated with its purchased electricity (scope 2); and all its other upstream and downstream emissions (suppliers and distributors) (scope 3).

Opaque supply chains: 85% of the brand’s production is overseas, supply chains have become multitiered (contractors outsourced to subcontractors); that’s made traceability problematic for scope 3 (often greatest amount of emissions).

Confusing information: Consumers cannot interpret information coming from reports. (fleece jackets generates 20 pounds of CO2 but what does this mean?)

Inattention to developing countries: the greatest increases in consumption, emissions, and social impacts in the coming decades will occur in Asia and Africa.

Question 27

ESG Is oversold?… Problems in using reports

Answer 27

A 2020 study by Barclay’s looked at two decades of ESG investing and found no difference between the holdings of sustainable and traditional funds
Unreliable ratings: The growth in the number of ESG raters has not improved reliability: there are structural measurement and reporting problems because the data is voluntarily shared, largely unaudited, and incomplete.
Lack of comparability: impossible to compare companies on the basis of ESG performance. Out of 51 relevant GRI indicators, only four appear in more than three-quarters of the companies’ GRI reports.
Challenges in assessing the success of socially responsible investing: the vast majority of ESG investment is allocated to mutual funds that either stay away from specific industries (mainly tobacco and weapons).
Parameters tweaking: Firms are mostly focused on tweaking parameters—dials that can be turned up and down to change performance without altering the structure of the larger system. They are rarely sources of real impact…

Question 28

ESG Is oversold?… What to do…

Answer 28

But if we are to bend the global emissions curve downward and address growing environmental and social challenges effectively, a more aggressive approach is needed.
Measure less, better. No matter what standard ultimately prevails, sustainability reports must be mandated and audited by an empowered referee.
Mobilize. Vested interests and system inertia have been formidable obstacles to progress (activism = good trouble.)
Spend government funds on the right things. According to the IMF, global subsidies for fossil fuels topped $5 trillion in 2017.

Change the system. Executives and investors operate in keeping with the rules and incentives of the system. If their behavior is to change, the rules that governments set and enforce also need to change…. Carbon emissions should be capped or taxed to account for their social costs; the agriculture industry should be incentivized to transition from spewing carbon to sequestering it; and lawmakers should ban the building of new thermal coal plants as a source of primary energy.
A sustainable system will ultimately require a paradigm shift from the prevailing goal of wealth creation to one of well-being, and a shift in focus away from GDP and toward something akin to the OECD’s Better Life Index. Commitments to concepts such as regenerative agriculture, reuse, and collective value represent first steps in the right direction.