Author: Bryan, Lowell L.
Source: The McKinsey Quarterly
Today's approach to measuring financial performance is geared excessively to the capital-intensive operating styles of 20th-century industrial companies. It doesn't sufficiently account for factors such as the contributions of talented employees that, more and more, are the basic source of wealth.
Financial performance—observed through balance sheets, cash flow reports, and income statements—is and always will be the principal metric for evaluating a company and its managers. But greater attention should be paid to the role of intangible capital and the ways of accounting for it.
The superior performance of some of the largest and most successful companies over the past decade demonstrates the value of intangible assets.
Companies can redesign the internal financial performance approach and set goals for the return on intangibles by paying greater attention to profit per employee and the number of employees rather than putting all of the focus on returns on invested capital.