05/23/2013 02:19 pm ET Updated Jul 23, 2013

About Leadership: Balanced Scorecard

The word balance can mean many things. Our life is in balance when we have a good mixture of work, love, community. But our life hangs in the balance when there is a danger that removing one element, or tripping one switch, will end it. As a chemist, I learned to use the two-pan balance to weigh small quantities of chemicals, adding small weights, so tiny that a fingerprint would give an erroneous result, until the needle stopped in the center of its swing. As a child we sit on the seesaw, and our friend sits on the other end, and we try to get it to stop, perfectly balanced.

The idea of balanced scorecard comes from an evolution of thinking about business objectives at the corporate or business unit level. It can be applied to individuals, but it is really an idea about the objectives of the entire management. What are we trying to achieve as a company? There was a time, and it perhaps still exists in some smaller companies, appropriately even, where the objectives were very simple: Sell x amount of product and do it profitably. Grow sales. Take market share. Enhance margin. The business of the company is business, and that is about money. The bottom line.

Then some years ago, mostly as a result of external pressure -- from shareholders, maybe from customers, from regulators, from NGOs -- where companies started to say, we need to have some non-financial objectives as well. Sometimes it was the Board that pushed management in this direction; sometimes the Board did not see this need as clearly as management. So we began, maybe 20 years ago, to see reward for the CEO and senior executives having a weighting, something like 75 percent on financial objectives, 25 percent on non-financial, such as customer complaints, something about environmental protection, employee turnover, things like that.

And from this evolved a very useful idea, the balanced scorecard. What it says is this: As a corporation, we have to accomplish a number of things, in broad categories. Meet the business plan; keep employees safe, healthy and happy; protect and enhance the communities in which we operate; care for the environment; operate within the law. Different for every corporation, to be sure, but broad categories like these. And then within these categories, one can have annual objectives, such as reduce our lost time incident rate (safety) by 10 percent; reduce absenteeism by 15 percent; reduce our emissions to air and water below the average of any country in which we operate; target community support through creation of a community arts panel; and of course, increase profit before tax by $10 million, reduce operating costs so that we eat inflation. And when the corporate leadership, together with the board, can agree that these objectives, somewhere between say 5 and 20 of them, are what we need to accomplish to be successful, that these are our targets and these are the stretch targets beyond the base, then this can be the basis for reward -- salaries, bonus, stock, whatever is appropriate. But more important, these objectives are the implementation of strategy, the clear focus on what we as a company are trying to execute.

Now one way of thinking of this as a balanced scorecard is that it includes all the key elements that are important to the company, the key constituencies -- shareholders, employees, customers, regulators, community. And that is the way I think most people see the idea of balance in this scorecard. But there is another. When we use this scorecard, live with it, for a while, we inevitably find that sometimes we have to sacrifice something to achieve something else. Now not every target can be sacrificed as easily as every other. We cannot compromise safety, or environmental protection, or ethical behaviour, to improve profits. But sometimes we have to sacrifice our goal on operating costs to reduce emissions, or to achieve a regulated outcome that was more difficult than we thought it would be. Sometimes we have to take a hit on employee motivation in order to redesign work patterns that are more efficient and effective. It is when balance takes on this meaning that management is called upon to make the most difficult judgements, and, I think, earns the admiration of the board.

About Leadership:
About Leadership is a series of 52 columns on corporate leadership - essential skills, leading teams, managing your career, the strategic and business practices to make a company and its leader distinctive from competitors. These columns will be of interest to people leading small and medium sized companies today, many of whom have not had much formal training in management skills and techniques; for the many people in big companies who aspire to senior management; and for anyone who thinks: Give me a hint, how can I do this better?