Modeling the Performance Evaluation of Local Investment and Economic Development Corporation By Frédéric Bernard Jean Desrochers Denis Martel Jacques Préfontaine.

Modeling the Performance Evaluation of Local Investment and Economic Development Corporation

By 

Frédéric BernardJean Desrochers

Denis MartelJacques Préfontaine

International Business & Economic Research ConferenceLas Vegas , Nevada, October 2-6 2006

Groupe Recherche Capital Risque Chaire DesjardinsFaculté d’Administration Université de Sherbrooke

Structure of the Structure of the PresentationPresentation

IntroductionIntroduction Literature reviewLiterature review MethodologyMethodology Empirical resultsEmpirical results Discussion and ConclusionDiscussion and Conclusion

IntroductionIntroduction

Traditionally, performance in finance is Traditionally, performance in finance is mesured in terms of risk and return.mesured in terms of risk and return.

We use the Sharpe ratio, the Treynor We use the Sharpe ratio, the Treynor ratio and the Jensen measure.ratio and the Jensen measure.

Can we develop alternative Can we develop alternative performance measures for firms, performance measures for firms, ethical mutual funds or non-profit ethical mutual funds or non-profit organizations ? organizations ?

IntroductionIntroduction

For many years, many For many years, many non-profit non-profit organizations and companies with organizations and companies with other than financial objectives other than financial objectives have been active in the economy.have been active in the economy.

Measuring performanceMeasuring performance along along many objectivesmany objectives is a delicate is a delicate mattermatter

IntroductionIntroduction

Very often, some of these objectives Very often, some of these objectives may appear contradictorymay appear contradictory

For example, better working For example, better working conditionsconditions and and the profit the profit maximization objectivemaximization objective

Objectives of the Objectives of the StudyStudy The major objective of this study The major objective of this study

is to develop a performance is to develop a performance measure for organizations who measure for organizations who have other goals in addition to have other goals in addition to the traditional financial goal.the traditional financial goal.

The second objective is to present The second objective is to present a methodology which will help the a methodology which will help the financial analyst to guide the financial analyst to guide the management of an organization management of an organization pursuing multiple goals.pursuing multiple goals.

Literature ReviewLiterature Review

Forbes (1998)Forbes (1998) identified four main identified four main waysways of measuring effectivenessof measuring effectiveness : :

– 1) 1) goal attainment approachgoal attainment approach – 2) 2) system resource approachsystem resource approach – 3)3) reputational approach reputational approach – 4) 4) social constructionist or emergentsocial constructionist or emergent approachapproach (new approach) (new approach)

Literature ReviewLiterature Review

O. Renz and Herman (1998)O. Renz and Herman (1998) sougth to sougth to create a model that could distinguish create a model that could distinguish between effective and less effective NPOs between effective and less effective NPOs (Non Profit Organizations)(Non Profit Organizations)

– Impossible to construct a general Impossible to construct a general effectiveness index adapted to all types of effectiveness index adapted to all types of NPOsNPOs

– Adopting various management practicesAdopting various management practices would would promote greater organizational effectivenesspromote greater organizational effectiveness

Literature ReviewLiterature Review

Quarter and Carmichael (2001)Quarter and Carmichael (2001) confirmed the confirmed the lack of an index to lack of an index to measure the social impact of measure the social impact of social investment fundssocial investment funds

– Little research has been conducted Little research has been conducted on the financial return that social on the financial return that social investment funds have to sacrificeinvestment funds have to sacrifice

Literature ReviewLiterature Review

Norton and Kaplan (2001) Norton and Kaplan (2001) developed the “Balanced developed the “Balanced Scorecard” approach.Scorecard” approach.

– This method is useful to achieve the This method is useful to achieve the goals and objectives of the firm but, goals and objectives of the firm but, it’s not a very robust method to it’s not a very robust method to compare firms with one another.compare firms with one another.

FSTQLabour sponsored

venture capital funds

Methodology : The Structure of Methodology : The Structure of the Solides’ the Solides’ Economic Development Corporation Organization

SOLIDEQSolide Central

UMRCUnion of municipal regional counties

SOLIDE #1 SOLIDE #80SOLIDE #n

MethodologyMethodology

To explain the methodology, the To explain the methodology, the model includes three objectives for model includes three objectives for the Solide organization. the Solide organization.

Methodology :Methodology :

The first objective is financial. It’s The first objective is financial. It’s important for a firm to obtain important for a firm to obtain sufficient revenues to achieve the sufficient revenues to achieve the long term viability of the long term viability of the organization.organization.

The second objective is social The second objective is social development. In fact, the firm must development. In fact, the firm must obtain a good performance in job obtain a good performance in job preservation and creation.preservation and creation.

Methodology :Methodology :

The third objective is operational. The third objective is operational. Since the NPOs have a board of Since the NPOs have a board of directors who do volunteer work, directors who do volunteer work, the NPOs must have to document the NPOs must have to document and file all informations and file all informations concerning their decisions.concerning their decisions.

Methodology : The three Methodology : The three axes of performance axes of performance measurementmeasurement

Social development

Operational

Financial

Performance

I

III

II

MethodologyMethodology

We develop and use a concept of We develop and use a concept of surface to represent the surface to represent the performance of the firm on each performance of the firm on each of the three objectives. This of the three objectives. This method was also applied by Weiss method was also applied by Weiss (2002) to the selection of stocks (2002) to the selection of stocks of ethical investment funds.of ethical investment funds.

Methodology : Applying the effectiveness surface concept

72.0%

53.7%

82.9%

53.7%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

Overall social development effectiveness score

Overall financial effectivenessscore

Overall operational effectiveness score

Overall financial effectivenessscore

TOTAL SURFACE

83.18 / 200

72.0%

53.7%

82.9%

53.7%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

Overall social development effectiveness score

Overall financial effectivenessscore

Overall operational effectiveness score

Overall financial effectivenessscore

TOTAL SURFACE

83.18 / 200

Methodology : Sample Methodology : Sample DataData 80 SOLIDE’s from Canada, PQ80 SOLIDE’s from Canada, PQ

– ¨Société locale d’investissement et ¨Société locale d’investissement et de développement d’emploide développement d’emploi ¨ ¨

– Local Investment and Economic Local Investment and Economic Development CorporationsDevelopment Corporations

The data set spans 5 yearsThe data set spans 5 years

Methodology : Methodology : Measuring Measuring Performance on the Performance on the AxesAxes The financial objective axis is measured as The financial objective axis is measured as

follows:follows:

1)1) Average two-year return Average two-year return 2)2) Average one-year return on available Average one-year return on available funds funds (SOLIDE capital plus retained (SOLIDE capital plus retained earnings) earnings) 3)3) Aggregate capital return (last year’s Aggregate capital return (last year’s

revenue plus retained earnings divided revenue plus retained earnings divided by the by the capital since the SOLIDE’s capital since the SOLIDE’s creation). creation). 4)4) Total losses on disbursements. Total losses on disbursements.

Methodology : Methodology : Measuring Measuring Performance on the Performance on the AxesAxes The social development objective axis is The social development objective axis is

measured as follows :measured as follows :

1)1) The average cost of a job createdThe average cost of a job created2)2) The average number of jobs per The average number of jobs per projectproject3)3) The development lever (number of The development lever (number of indirect jobs created)indirect jobs created)4)4) The extent of the SOLIDE’s activities The extent of the SOLIDE’s activities (evaluated by the SOLIDEQ advisor)(evaluated by the SOLIDEQ advisor)

Methodology : Methodology : Measuring Measuring Performance on the Performance on the AxesAxes The social development objective axis The social development objective axis

is measured as follows (continued):is measured as follows (continued):

5)5) Integration of the SOLIDE withinIntegration of the SOLIDE within SOLIDEQSOLIDEQ (Idem)(Idem)

6)6) Interest shown by the board of Interest shown by the board of directors directors in the SOLIDE (Idem)in the SOLIDE (Idem)7)7) Concern for the social impact of Concern for the social impact of

investments (Idem)investments (Idem)

Methodology : Methodology : Measuring Measuring Performance on the Performance on the AxesAxes The operational objective axis is The operational objective axis is

measured as follows :measured as follows :

1)1) Competency of the SOLIDE Competency of the SOLIDE analysts analysts (evaluated by the SOLIDEQ (evaluated by the SOLIDEQ advisor)advisor)

2)2) Investment follow-up (Idem)Investment follow-up (Idem)

3)3) Prospecting (Idem)Prospecting (Idem)

4)4) Relationship with SOLIDEQ (Idem)Relationship with SOLIDEQ (Idem)

Methodology : Methodology : Measuring Measuring Performance on the Performance on the AxesAxes All component for each objective All component for each objective

are equally weighted.are equally weighted.

Individual results for each objective Individual results for each objective are evaluated and ranked are evaluated and ranked

Total performance is ranked and Total performance is ranked and compared with individual resultscompared with individual results

Empirical Results : The Empirical Results : The Top ¨10¨Top ¨10¨

SOLIDE Ranking

Financial Effectiveness Indicator

Social Effectiveness Indicator

Operational Effectiveness

Indicator

Overall Performance Indicator

1 0.95 ( 6.5) 0.97 (01) 0.85 (3.5) 172.49

2 0.98 ( 4.5) 0.84 (11) 0.88 (1.0) 167.42

3 1.00 ( 1.5) 0.93 (03) 0.74 ( 17) 166.86

4 0.95 ( 6.5) 0.78 (20) 0.87 (2.0) 156.75

5 0.87 (16.0) 0.87 (06) 0.85 (3,5) 148.07

6 0.81 (24.0) 0.94 (02) 0.83 (6.0) 143.41

7 0.88 (12.5) 0.84 (10) 0.76 ( 12) 140.00

8 0.88 (12.5) 0.90 (04) 0.70 ( 23) 140.00

9 0.93 ( 8.0) 0.69 (32) 0.75 (14) 132.80

10 0.80 (25.0) 0.82 (13) 0.81 (8.5) 130.17

Empirical Results : Empirical Results : Effectiveness Surface for #1 Effectiveness Surface for #1 SolideSolide

85.0%

95.0%

96.6%

95.0% 0,0%

20,0% 40,0% 60,0% 80,0%

100,0%

Global social development score

Global financial

effectiveness score

Global operational effectiveness score

Global financial

effectiveness score

TOTAL SURFACE 172.49

Result : the bottom 10 Result : the bottom 10 SolidesSolides

SOLIDE Ranking

Financial Effectiveness Indicator

Social Effectiveness Indicator

Operational Effectiveness

Indicator

Overall Performance Indicator

71 0.38 (67) 0.34 (76) 0.35 (72.5) 25.99 72 0.31 (73) 0.53 (59) 0.30 (76.0) 25.64 73 0.29 (74) 0.34 (77) 0.50 (59.5) 24.08 74 0.32 (71) 0.29 (79) 0.38 (71.0) 21.17 75 0.23 (76) 0.40 (74) 0.40 (69.5) 18.52 76 0.15 (78) 0.55 (57) 0.58 (49.0) 16.14 77 0.25 (75) 0.55 (78) 0.08 (80.0) 15.60 78 0.17 (77) 0.50 (66) 0.28 (78.0) 12.98 79 0.13 (79) 0.44 (71) 0.48 (63.5) 11.80 80 0.12 (80) 0.31 (78) 0.60 (42.5) 10.81

Results : diagram for Results : diagram for #80#80

60.0%

11.8%

31.4%

11.8%

0,0%

20.0%

40.0%

60.0%

80,0%

100,0%

Overall social development score

Overall financial effectiveness score

Overall operational effectiveness score

Overall financial effectiveness score

TOTAL SURFACE10.81

DiscussionDiscussion

The Effectiveness Surface method The Effectiveness Surface method helps to evaluate the performance of helps to evaluate the performance of organizations which strive to reach organizations which strive to reach multiple objectives. multiple objectives.

The major advantage of using the The major advantage of using the Effectiveness Surface method is that it Effectiveness Surface method is that it allows the user to clearly evaluate the allows the user to clearly evaluate the situation and better target subsequent situation and better target subsequent interventionsinterventions

ConclusionConclusion

The proposed model uses a surface concept The proposed model uses a surface concept defining the ranking of firms according to defining the ranking of firms according to overall performance along several objectives. overall performance along several objectives.

Analysts examining the rankings can visually Analysts examining the rankings can visually determine in which areas : financial, determine in which areas : financial, operational or social the organization’s operational or social the organization’s strengths and weaknesses lie. strengths and weaknesses lie.

We propose to extend the formulation of the We propose to extend the formulation of the Effectiveness Surface model to evaluate the Effectiveness Surface model to evaluate the performance of heterogeneous organizations.performance of heterogeneous organizations.