Article Summary
- Benchmarking Types: The text explains six common types of benchmarking, including competitive, performance, strategic, internal, practice, and external benchmarking.
- Benefits for Corporate Governance: Benchmarking enhances corporate governance by increasing accountability, fostering shareholder confidence, facilitating continuous improvement, establishing best practices, and promoting new agendas.
- Implementation and Challenges: Implementing benchmarking involves setting objectives, selecting peer companies, collecting and analyzing data, and making necessary changes. Challenges include data accessibility, contextual variations, subjectivity, and the potential for a competitive rat race.
According to Gordoy, benchmarking is ‘…a systematic, quantitative comparison between one or more key aspects of an organization and a referent considered the best example of that type of organization. Its purpose is to enhance the organization’s performance and competitiveness…’.
Thus, benchmarking can be said to be a process whereby a company compares its metrics against the industry standards or the top companies in the sector, to identify areas in their metrics that require improvement or changes; or to determine metrics that should be added to the evaluation system of the organization.
Therefore, benchmarking should be viewed as a corporate governance mechanism that keeps the company abreast with its strengths and weaknesses compared to the industry standard.
To understand the essence of benchmarking, the types of benchmarking need to be discussed.
Types of benchmarking
Several academics and professional experts have identified various types of benchmarking, however, the most common types identified are six, namely; competitive, performance, internal, external, and strategic and practice benchmarking
- Competitive Benchmarking: This entails identifying areas in which a company is not performing as well as its competitors, and as a result, using and setting their competitors’ success in the specific area of operations where they are lacking, as the baseline that the company needs to achieve (See ‘7 Types of Benchmarking for Better Business Decisions’ by Winik. M). Competitive benchmarking involves a methodical approach that involves setting precise objectives and evaluation standards, which is followed by discovering current market/sectorial trends. This form of operational benchmarking will enable companies to be able to rapidly discover the directions other organizations in their market are headed and foresee new trends.
- Performance Benchmarking: This process of benchmarking involves collecting and contrasting numerical data (measures or key performance indicators). It has been submitted that most businesses use this kind of benchmarking to start when looking for performance gaps (See Harper M ‘Understanding What Benchmarks Do What’). Performance benchmarking compares the profitability of certain metrics utilized by a company’s competitors to aid the company to create specific goals. Additionally, performance benchmarking enhances crucial company operations over a period, which eventually helps to raise and improve the company’s standards.
- Strategic benchmarking: This process of benchmarking analyzes the methods industry leaders utilized in attaining success; the strategies adopted by these companies are scrutinized. It has been opined that this method is best suited for startups and new companies because it helps companies understand the market and learn from the success of established companies in their sector (See ‘6 Types of Benchmarking Your Business Needs to Know About’ by Spiegel S).
- Internal Benchmarking: just as the name suggests, this type of benchmarking is done internally and requires a review of tasks, targets, and departmental key performance indicators. It has been asserted that this method of benchmarking is best suited for large organizations, with competing or complimentary departments (See ‘7 Types of Benchmarking for Better Business Decisions’ by Winik. M). This type of benchmarking is effective because it creates uniformity and ensures that every department performs as effectively as possible, by assisting in the setting and attaining expectations across the board.
- Practice benchmarking: This method of benchmarking involves accessing the process of how things are done to access gaps and strengths and analyse how to improve the process, this form of benchmarking can be done internally and externally.
External benchmarking: this type of benchmarking requires an examination of market data and peer metrics to ascertain areas of growth and weaknesses in a company. Indeed Editorial team, opined that to guarantee that conclusions are fair and fact-based, this approach of benchmarking frequently makes use of objective data (See. What is benchmarking? With Purposes, 8 Types, and Example).
How does benchmarking enhance corporate governance?
- Increases Accountability and candour
Organizations are encouraged to implement transparent reporting procedures via benchmarking. Companies learn where they may be lacking by comparing their financial and non-financial performance to industry yardsticks. The insight gained from benchmarking enables them to be able to rectify deficiencies, enhance reporting processes, and create more accountability and candour.
- Fosters shareholder’s confidence
Benchmarking fosters shareholders’ confidence in the management of the company. This is because it offers a concrete way for businesses to show their dedication to good corporate governance. Businesses can show off their efforts to improve their metrics to shareholders by benchmarking against the industry standards and top companies in their sector. This improves stakeholder trust in the organization’s governance practices, which in turn will increase their support and trust in management.
- A mechanism for continuous improvement
Companies can pinpoint areas where they fall short of industry standards or lag behind their rivals through benchmarking, this allows them to continuously be ‘au fait’ with industry standards so they are not left behind. Identified performance gaps through benchmarking draw attention to particular facets of corporate governance that require improvement within the organization. Benchmarking makes it easier to conduct a thorough analysis of governance procedures and helps develop specialized improvement plans.
- Establishing a revolving door of Best Practices
Benchmarking allows companies to build or improve on their internal best practices structure which also has a chain reaction on the external best practices standards in an industry. Through observing industry leaders’ strategies, other companies can inculcate the practices of these companies and in most cases not only do they inculcate, but they also improve on these practices to become companies that are emulated. Thus, this creates a revolving door of improved corporate governance practices in the sector. Every company wants to be better than its peers, and benchmarking allows for healthy competition, that in turn improves the standard of corporate governance and best practices in the sector.
- Pushes ‘nouvelle’ agendas
The corporate world is very competitive, everyone wants to be the best and wants to be seen as being at the forefront of ‘nouvelle’ corporate governance practice. Through benchmarking ‘nouvelle’ areas in corporate governance such as, the Environmental (E) and the Social (S) part of Environmental, Social, and Governance ESG Practices are gaining momentum at a faster pace. Everyone wants to be seen as an early adopter/Industry first, the spirit of competition that comes with benchmarking allows for ‘nouvelle’ agendas in corporate governance to spread fast. Knowing the many benefits of benchmarking, an important question now arises, how does one implement it?
How to implement a benchmarking strategy
- Identifying Objectives and Metrics
The objectives and benchmarking metrics should be clearly stated. Establish quantifiable indicators to measure performance and decide which elements of corporate governance are most important for the firm.
- Cherry-picking peer companies
To benchmark efficiently companies must find comparable businesses or industry leaders who can act as benchmarks. To enable useful performance comparisons, these firms should have comparable operations, size, and market presence.
- Data collation and Analysis
The collation of pertinent information from internal and external sources is vital in benchmarking. Benchmarking involves analyzing financial reports, corporate governance guidelines, sustainability studies, and market analysis to gather valuable insight. To identify performance gaps and potential areas for improvement, data analysis is imperative. Companies must engage the services of established corporate governance consultants and firms, the industry’s best financial experts, and business professionals to analyse and collate data for an effective benchmarking process
The last stage of implementing a benchmarking strategy is affecting the discoveries made in the internal structure of the company. This can be done by creating plans and projects to fix gaps found and synchronize company governance processes with industry norms. Follow developments and make any required changes as you go.
Possible Barriers companies might face to benchmarking
Despite the many advantages benchmarking provides there are some drawbacks as well. The following are some typical problems with corporate governance benchmarking:
- Data Accessibility: It might be difficult for certain companies to find the required data to enable them to carry out efficient benchmarking. This is especially true for privately held businesses or those engaged in highly specialized sectors, it is a lot harder for them to get thorough and trustworthy benchmarking data.
- Contextual Variations: Various contextual elements, like legal and regulatory frameworks, cultural norms, industry-specific dynamics, and stakeholder expectations, have an impact on corporate governance. Without taking these contextual aspects into account, benchmarking might result in erroneous evaluations and comparisons.
- Subjectivity
Corporate governance includes both structural factors, such as board independence and composition, and subjective factors, including board performance and ethical decisions. Due to prejudice and varying interpretations, evaluating these subjective components and precisely capturing opinions in benchmarking can be challenging.
- Corporate governance best practices as a living instrument
In explaining corporate governance best practices, I will borrow the word ‘living Instrument’ which was coined by the European Court of Human Rights. Corporate governance best practices are forever evolving and thus a living instrument. Organizations face the challenge of keeping up with these changes and ensuring that their benchmarking initiatives are in line with the most recent regulatory requirements. Corporate governance practices and regulations evolve, driven by changes in business environments and stakeholder expectations.
- Race to the top/ rat-race
As discussed in our previous article ‘Examining the balance between performance metrics and remuneration for the board of directors. Benchmarking certain aspects of an industry such as executive remuneration has its disadvantages. Benchmarking could lead to unnecessary pressure on companies where they have to constantly watch their backs, in order not to be surpassed in performance or left behind. It can create a rat race among companies. Notwithstanding, the benefits of benchmarking outweighs its disadvantages.
Conclusion
Benchmarking is a critical component in strengthening corporate governance procedures. Corporations may use it to find best practices, establish performance benchmarks, increase accountability and candour, and set new industry standards. Nevertheless, there are obstacles to measuring corporate governance, including a lack of standards, a lack of data, and contextual variations. Businesses may use benchmarking as a useful tool to develop their governance structure and foster sustained success by adhering to best practices and learning from the successes of industry leaders in their sector.
Chioma Mordi – MD/CEO
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organization committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria. cmordi@corpgovnigeria.org