Modeling the Performance Evaluation of Local Investment and Economic Development Corporation

1. Modeling the Performance Evaluation of Local Investment and Economic Development Corporation By Frédéric Bernard Jean Desrochers Denis Martel Jacques Préfontaine International Business & Economic Research Conference Las Vegas , Nevada, October 2-6 2006 Groupe Recherche Capital Risque Chaire Desjardins Faculté d’Administration Université de Sherbrooke

2. Structure of the Presentation • Introduction • Literature review • Methodology • Empirical results • Discussion and Conclusion

3. Introduction • Traditionally, performance in finance is mesured in terms of risk and return. • We use the Sharpe ratio, the Treynor ratio and the Jensen measure. • Can we develop alternative performance measures for firms, ethical mutual funds or non-profit organizations ?

4. Introduction • For many years, many non-profit organizations and companies with other than financial objectives have been active in the economy. • Measuring performance along many objectives is a delicate matter

5. Introduction • Very often, some of these objectives may appear contradictory • For example, better working conditions and the profit maximization objective

6. Objectives of the Study • The major objective of this study is to develop a performance measure for organizations who have other goals in addition to the traditional financial goal. • The second objective is to present a methodology which will help the financial analyst to guide the management of an organization pursuing multiple goals.

7. Literature Review • Forbes (1998)identified four main waysof measuring effectiveness : • 1) goal attainment approach • 2) system resource approach • 3) reputational approach • 4) social constructionist or emergent approach (new approach)

8. Literature Review • O. Renz and Herman (1998) sougth to create a model that could distinguish between effective and less effective NPOs (Non Profit Organizations) • Impossible to construct a general effectiveness index adapted to all types of NPOs • Adopting various management practiceswould promote greater organizational effectiveness

9. Literature Review • Quarter and Carmichael (2001) confirmed the lack of an index to measure the social impact of social investment funds • Little research has been conducted on the financial return that social investment funds have to sacrifice

10. Literature Review • Norton and Kaplan (2001) developed the “Balanced Scorecard” approach. • This method is useful to achieve the goals and objectives of the firm but, it’s not a very robust method to compare firms with one another.

11. Methodology : The Structure of the Solides’ Economic Development Corporation Organization UMRC Union of municipal regional counties FSTQ Labour sponsored venture capital funds SOLIDEQ Solide Central SOLIDE#1 SOLIDE#n SOLIDE#80

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

13. Methodology : • The first objective is financial. It’s important for a firm to obtain sufficient revenues to achieve the long term viability of the organization. • The second objective is social development. In fact, the firm must obtain a good performance in job preservation and creation.

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

15. Performance I II Financial Social development Operational III Methodology : The three axes of performance measurement

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

17. Methodology : Applying the effectiveness surface concept

18. Methodology : Sample Data • 80 SOLIDE’s from Canada, PQ • ¨Société locale d’investissement et de développement d’emploi ¨ • Local Investment and Economic Development Corporations • The data set spans 5 years

19. Methodology : Measuring Performance on the Axes • The financial objective axis is measured as follows: 1) Average two-year return 2) Average one-year return on available funds (SOLIDE capital plus retained earnings) 3) Aggregate capital return (last year’s revenue plus retained earnings divided by the capital since the SOLIDE’s creation). 4) Total losses on disbursements.

20. Methodology : Measuring Performance on the Axes • The social development objective axis is measured as follows : 1) The average cost of a job created 2) The average number of jobs per project 3) The development lever (number of indirect jobs created) 4) The extent of the SOLIDE’s activities (evaluated by the SOLIDEQ advisor)

21. Methodology : Measuring Performance on the Axes • The social development objective axis is measured as follows (continued): 5) Integration of the SOLIDE within SOLIDEQ (Idem) 6) Interest shown by the board of directors in the SOLIDE (Idem) 7) Concern for the social impact of investments (Idem)

22. Methodology : Measuring Performance on the Axes • The operational objective axis is measured as follows : 1) Competency of the SOLIDE analysts (evaluated by the SOLIDEQ advisor) 2) Investment follow-up (Idem) 3) Prospecting (Idem) 4) Relationship with SOLIDEQ (Idem)

23. Methodology : Measuring Performance on the Axes • All component for each objective are equally weighted. • Individual results for each objective are evaluated and ranked • Total performance is ranked and compared with individual results

24. Empirical Results : The Top ¨10¨

25. Global social development score 96.6% 100,0% T OTAL SURFACE 80,0% 172.49 60,0% 40,0% 20,0% 95.0% 95.0% Global financial Global financial 0,0% effectiveness score effectiveness score 85.0% Global operational effectiveness score Empirical Results : Effectiveness Surface for #1 Solide

26. Result : the bottom 10 Solides

27. Overall social development score 100,0% TOTAL SURFACE 80,0% 10.81 60.0% 40.0% 31.4% 20.0% 11.8% 11.8% Overall financial effectiveness score Overall financial effectiveness score 0,0% 60.0% Overall operational effectiveness score Results : diagram for #80

28. Discussion • The Effectiveness Surface method helps to evaluate the performance of organizations which strive to reach multiple objectives. • The major advantage of using the Effectiveness Surface method is that it allows the user to clearly evaluate the situation and better target subsequent interventions

29. Conclusion • The proposed model uses a surface concept defining the ranking of firms according to overall performance along several objectives. • Analysts examining the rankings can visually determine in which areas : financial, operational or social the organization’s strengths and weaknesses lie. • We propose to extend the formulation of the Effectiveness Surface model to evaluate the performance of heterogeneous organizations.