Measures of Corporate Effectiveness and
the Management Top 250 Rankings
Posted by Rick Wartzman and Kelly Tang,
Drucker Institute, on Tuesday, November 26, 2019
Rick Wartzman is head of the KH Moon Center for a Functioning
Society, a part of the Drucker Institute, and
Kelly Tang is senior director of research at the Drucker
the Business Roundtable
announced last August that the CEOs of many of America’s largest companies
were making a “fundamental commitment to all of our stakeholders”—and would no
longer stand behind the notion that shareholders’ interests should be placed
ahead of everyone else’s—the reaction from many quarters was swift: That sounds
great. But how are we going to be able to tell if any of this is real?
“As every member of the
Business Roundtable assuredly knows, accomplishing anything depends on defining
terms, setting goals, and measuring progress,”
Gallup observed. “Simply, the members of the Roundtable need new metrics.”
approach—relying heavily on stock price and other financial indicators to drive
key corporate decisions and establish executive compensation—has brought steep
costs for society and even for capitalism itself. “There’s a growing realization
that a focus on one key stakeholder or metric is as flawed as using your
cholesterol level as the only measure of your health,” corporate
sustainability consultant Andrew Winston
wrote in Harvard Business Review after the Roundtable issued its
Forbes commentator noted, “As we change our collective goals, we
have to change the metrics by which we measure success.”
Six years ago, as part
of our own effort to encourage executives and investors to reject shareholder
primacy and embrace stakeholder capitalism, the Drucker Institute set out to do
just that. Our aim was to come up with a credible alternative to short-term
financial metrics—one that would provide a much more holistic picture of how
well a company is managed.
The result is our
Drucker Institute company rankings, which seek to assess the performance of
a group of large, publicly traded U.S. corporations across five areas: customer
satisfaction, employee engagement and development, innovation, social
responsibility, and financial strength.
Our model, which is
transparent and adheres to the rigors of
sound data science, is guided by the core tenets of the late Peter Drucker,
widely considered the father of the field of management. In his landmark book
The Practice of Management, published in 1954, Drucker laid out the
kind of comprehensive, stakeholder-oriented philosophy that the Roundtable is
expressed that companies had to satisfy their customers’ needs because “it is to
supply the consumer that society entrusts wealth-producing resources to the
business enterprise.” Drucker also believed that a corporation must take care of
its employees, maintaining that if “worker and work are mismanaged” it will, “by
creating class hatred and class warfare, end by making it impossible for the
enterprise to operate at all.”
In addition, he wrote,
companies must constantly pursue innovation so as to serve their function as
society’s “specific organ of growth, expansion, and change.” What’s more,
Drucker asserted, management must “consider the impact of every business policy
and business action upon society” and even go so far as to “make whatever is
genuinely in the public good become the enterprise’s own self-interest”—a
forerunner of the concept of
held that none of this was in conflict with ensuring a company’s financial
health. Management’s “first responsibility,” he declared, “is to operate at a
profit” so as to fulfill the role of business as “the wealth-creating and
wealth-producing organ of our society.”
The challenge for the
Drucker Institute was to capture and express these nuanced principles in
consistent, numerical terms at an individual company level—and then combine all
of that data into a model that would make sense of the entire picture.
Thus began a four-year
development project involving a lot of trial and error, debate and discussion,
calculation and recalculation. One of the first tasks was to distill Drucker’s
39 books and some 1,500 articles into something you could wrap your arms around.
Eventually, our team homed in on
15 central principles spread across the five categories.
The next task was to
find the right data sources that would serve, in effect, as empirical proxies
for these underlying principles. We wound up settling on
37 sets of data from third-party sources. Finally, it was time for the
biggest step of all: creating the statistical model itself. This assignment fell
to our colleague
Lawrence Crosby, a data scientist with a great deal of industry experience.
Our hypothesis—based on
Peter Drucker’s writings—was that each of the five key areas should be
highly correlated, rising and falling together to a statistically significant
Although this might
seem obvious to those who have a “stakeholder” mindset, few, if any, studies had
approached the matter in a scientific way.
responsibility really correlate with innovation? Would financial strength show a
statistical relationship with, say, employee engagement and development? We
really didn’t know.
By 2016, Crosby had
assembled five years of data on a few hundred companies. It was now time to test
the hypothesis. And, sure enough, the correlations between each of the five
dimensions and the measure of total effectiveness ranged from 0.51 to 0.83,
which are exceptional figures in the realm of management science.
For the first time,
Peter Drucker’s worldview—that all of these different areas of corporate
management are deeply interrelated—had been borne out statistically.
Today, our rankings are the foundation of the Wall Street Journal’s Management
Top 250 list of the “best-run U.S. companies,” which is published late each
calendar year. Meanwhile, S&P Dow Jones Indices has turned our model into a financial
index that demonstrates the investment value of a stakeholder approach. And
First Trust Portfolios now has an
investment product based on the index’s methodology.
“The measurement used
determines what one pays attention to,” Peter Drucker advised 65 years ago. “It
makes things visible and tangible. The things included in the measurement become
relevant; the things omitted are out of sight and out of mind.”
If business leaders are
sincere about meeting the needs of all stakeholders, they need to take into
account stakeholder metrics—whether the Drucker Institute company rankings or
another broad-gauge measure—just as they do earnings and share price.
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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