Traditional accounting numbers and metrics don’t always tell the full story when it comes to relaying the value organisations are creating for all stakeholders. This is even more so for cooperatives and mutual enterprises (CMEs) because they carry out activities not just for revenues and profits but also to fulfil social purposes.
That was why a team of researchers — Matthew Hall, Yolande McNicoll, and I of Monash Business School; and Sarah Adams of Australian National University and Yuval Millo of Warwick Business School — were invited by the Business Council of Co-operatives and Mutuals (BCCM), the industry association for CMEs in Australia, to embark on a study to develop a performance measurement framework for CMEs.
Our two-year study developed a performance measurement framework specifically for CMEs that could help such organisations measure and communicate the value they created for members and the community in a consistent and holistic way.
Before we get to the framework, let’s take a deeper look at the challenges CMEs face in measuring and reporting their value creation.
The challenge at hand
Member-owned organisations, known as cooperatives and mutual enterprises, have a long and rich history. The first CME, Rochdale Cooperative, was established in the UK in 1844. Globally, one in every six people is a member of a CME, with the world’s top 300 CMEs contributing annual revenues of $2 trillion in 2019, according to the BCCM. In Australia, the first CME was established in 1859, and as of 2019, there were over 2,000 CMEs in Australia, with annual revenues of AUD 104 billion and over 31 million combined members (some Australians are members of multiple CMEs).
CMEs are distinctive in their long tradition of focusing on all stakeholders and having an inclusive corporate purpose. Credit unions and mutual banks, for example, were established to help communities borrow and deposit money and then carry out financial transactions.
However, CMEs do not have a framework capable of measuring fully the corporate purpose and the total value, ie, mutual value they create for all stakeholders. Accounting rules and standards have been found to be incomplete in measuring this mutual value.
For instance, when an organisation invests in a startup in a new market segment, it is creating value through shaping or building a market that is more than the initial funds invested. But this added value doesn’t typically show up in accounting transactions. These types of “added value” transactions are significant for CMEs as they reflect their purpose.
Rohan Mead, CEO of a large Australian CME in financial services, health and aged care, and health insurance, had said that CMEs create community value through their operations but accounting practices and measures only measure a small part of this value.
6 dimensions in the Mutual Value Measurement framework
Our project led to the development of the Mutual Value Measurement (MVM) framework (see the graphic, “Dimensions of Mutual Value”), which enables a CME to assess, measure, and report its mutual value resulting from its corporate purpose and value creation for all stakeholders. This approach can be used for other types of businesses, such as listed firms, and organisations, including charities and public-sector agencies.
The MVM framework was formally launched last year with the framework promoted by the BCCM through its membership base. Around 30 CMEs have examined the framework in more detail and are in the process of adopting the framework as part of their performance measurement process.
The framework has six dimensions — commerciality, shaping markets, member relationships, community relationships, ecosystem and reciprocity, and mutual mindset — which our research revealed as key areas in which CMEs create value. Here’s a brief explanation of each dimension:
- Commerciality captures the economic value created by the business operations of the CME. This value can be measured using standard accounting measures such as net profit.
- Shaping markets captures the value from activities designed to create, shape, and maintain a market by the CME. An example is a credit union that provides banking and financial services to a regional community that would otherwise not receive such services because the market may not be economically viable for a major commercial bank. The value from this dimension might be measured using accounting and nonaccounting measures.
- Member relationships is a dimension that captures value created for members over and beyond the value provided through the commerciality and shaping markets dimensions. This value is likely to be measured through nonaccounting measures.
- Community relationships captures the value created by the CME for the community beyond members. This value can be measured using qualitative measures such as community engagement surveys.
- Ecosystem and reciprocity refers to the value created by the CME for its ecosystem of partners, eg, suppliers. Qualitative measures such as stories and testimonials can be used to capture the value created in this dimension.
- Mutual mindset refers to a dimension where a CME captures value created through a focus on long-term decisions and ethical practices, and adherence to cooperative and mutual values. Through the focus on values, a mutual mindset enables each of the other five dimensions. Measurement of value for this dimension is carried out through the use of qualitative information, such as stories and testimonials.
Dimensions of mutual value (developed by the project team)
Case study: Nation Cover and the MVM framework
An early adopter of the MVM framework is Nation Cover (pseudonym), a midsize insurance CME in Sydney.
Before adopting the framework, its CEO was exploring different options for measuring and communicating its value to stakeholders and had reached a point where the leadership team couldn’t find any useful framework.
We later invited Nation Cover to be part of our research where we spent time interviewing managers and collecting data. Following the development of the MVM framework, the research team returned to Nation Cover to field-test the framework with key executives.
The CEO took the framework to the senior leadership team and to the board to explain the different elements, specifically, the six mutual value dimensions. The dimensions were used to review and refresh its strategy and to understand how the CME created value and how it could measure this value.
Nation Cover discovered that it had not recognised fully dimensions such as shaping markets and mutual mindset as areas where it created value. Consequently, it had no performance measures designed to capture these aspects of value.
The CME decided to embed the MVM framework in its corporate performance measurement and reporting dashboard. Nation Cover disaggregated the framework by dimension and business unit and allocated responsibilities for value-creation activities, performance metrics, and targets to senior executives.
Nation Cover is now developing data and support processes to measure its mutual value using the MVM framework. The senior leadership team is on a journey to measuring mutual value, and for the first time in its history, it can demonstrate its purpose and measure, and report the value it is creating for stakeholders.
Going beyond accounting numbers
Accountants are used to measurement with quantified accounting numbers and, increasingly, with nonaccounting metrics. However, nonaccounting metrics are used only if they can be “objectified” by quantification, as seen by how customer satisfaction surveys can be turned into a satisfaction index.
But our research found that some dimensions of mutual value cannot be measured by using only quantitative accounting and nonaccounting metrics. Qualitative information such as stories and testimonials are required and are useful in measuring value. For example, measuring value in the mutual mindset dimension can only be effectively achieved by using stories and testimonials of decisions made that considered long- or short-term perspectives.
However, there is reservation on using these to measure value created. In our interviews with managers in our case CMEs, we found that qualitative information was viewed as subjective, intangible, and messy to be used as performance measures. This view of qualitative information poses a challenge for performance measurement of purpose and value creation, and managers and organisations need to develop the skills and capabilities to overcome this challenge.
Current performance measurement practices focus on a single group of stakeholders, namely, shareholders, and use quantified metrics that do not fully capture the value and trade-offs that affect other stakeholders. The excessive emphasis on metrics may also prevent managers in business from taking a step back and thinking more carefully about what value is and how they create this value.
However, many leaders in the CME sector are aware of this challenge and welcome it. Measuring purpose and value for all stakeholders of a business is a challenging task and will require management accountants and managers to go beyond current approaches to performance measurement. This framework provides an example of how purpose and value can be measured in a holistic manner for all stakeholders.
— Paul Thambar, FCMA, CGMA, Ph.D., is a senior lecturer with the department of accounting at Monash Business School in Melbourne. His research interests include performance measurement, management controls, and management accounting in commercial, not-for-profit, and cooperative and mutual sectors. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.