Here is an excerpt from an article written by Michael J. Mauboussin for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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When it comes to assessing performance, business executives can be a lot like old-time baseball scouts. They’ve been around so long that they’ve developed a gut feel for which statistics matter most. But as Michael Lewis describes in Moneyball, the Oakland Athletics discovered that the metric the team’s scouts used to choose players had nothing to do with whether those players would score runs. They had been measuring the wrong thing, and executives may be making the same mistake.

The statistics that companies use most often to track and communicate performance include financial measures such as sales and earnings per share growth. Yet these have only a flimsy connection to the objective of creating shareholder value. Executives cling to these metrics because they are overconfident in their intuition, they misattribute the causes of events, and they do not escape the pull of the status quo.

Useful statistics have two qualities. They are persistent, showing that the outcome of an action at one time will be similar to the outcome of the same action at a later time; and they are predictive, demonstrating a causal relationship between the action and the outcome being measured.

Choosing the right statistics — metrics that will allow you to understand, track, and manage the cause-and-effect relationships that determine the value of your company — is a four-step process. I’ll illustrate the process in a simplified way using a fictional retail bank based on an analysis of 115 banks by Venky Nagar of the University of Michigan and Madhav Rajan of Stanford. Leave aside, for the moment, which metrics you currently use or which ones Wall Street analysts or bankers say you should. Start with a blank slate and work through these four steps in sequence.

[Here’s the first.]

Step 1: Define your governing objective. A clear objective is essential to business success because it guides the allocation of capital. Creating economic value is a logical governing objective for a company that operates in a free market system. Companies may choose a different objective, such as maximizing the firm’s longevity. We will assume that the retail bank seeks to create economic value.

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This blog was excerpted from Mauboussin’s article “The True Measures of Success” in the October issue of the magazine. To read the complete article, please click here.

Michael J. Mauboussin is chief investment strategist at Legg Mason Capital Management and is on the adjunct faculty of Columbia Business School. His new book is The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.