In September 2013, the Drucker Institute convened a group of scholars and business leaders to consider how to combat what we all agreed was a serious and growing problem for the economy and for society: the inordinate attention that most major companies devote to short-term financial results.
The gathering was thought-provoking. And we at the Drucker Institute left the meeting committed to creating a new measure of corporate performance—one that would give executives and investors a more complete, longer-term view of how a company was being managed. Four years later, that measure is being introduced.
Principles and measures
Our metric is based on the writings of the late Peter Drucker, the professor, consultant, author and longtime Wall Street Journal columnist.
It judges overall corporate effectiveness through the lens of 37 indicators that fall under five dimensions of performance: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength. We define effectiveness as Mr. Drucker did: “doing the right things well.”
The indicators come from a dozen data providers: the American Customer Satisfaction Index, Bloomberg Finance LP, Clarivate Analytics, CSRHub, Glassdoor, HIP Investor, PayScale, Satmetrix Systems, the Supply Chain Resource Cooperative, Sustainalytics, Temkin Group and wRatings. Alice Korngold, author of “A Better World, Inc.,” helped to develop the methodology for evaluating social responsibility.
Underlying our five categories are principles drawn from Mr. Drucker’s 39 books. For example, there’s this: “To satisfy the customer is the mission and purpose of every business.” And this: “Developing talent is business’s most important task.” And so on and so forth—to the tune of 15 different principles in all, spread across the five dimensions.
It is clear from our research that statistically significant increases in the areas of innovation, social responsibility, customer satisfaction, and employee engagement and development help to pump up a company’s financial strength within two years. And if those intangibles continue to improve, the gains in financial strength accelerate over time.
The big picture
All of which gets to another fundamental tenet of Mr. Drucker’s: He believed that while the value of a corporation’s shares was a good barometer of how well the business was being run, at least over an extended period of time, too many executives were “subordinating everything…to immediate earnings and next week’s stock price.”
Mr. Drucker’s holistic approach was born of necessity. When he started out as a management consultant in the 1940s, there was little to guide him. Much to his frustration, he could find books on individual aspects of operating a business—finance, for example, or human resources—but there was nothing that connected all of the pieces.
What was out there “reminded me of a book on human anatomy that would discuss one joint in the body—the elbow, for instance—without even mentioning the arm, let alone the skeleton and musculature,” Mr. Drucker later recalled. He would remedy this by writing The Practice of Management in 1954.
When it comes to measuring corporate performance with hard data, the situation today is much like the one Mr. Drucker faced more than 60 years ago. Most metrics assess a single aspect—or at most, a few aspects—of how a company is doing, with relatively little regard to how different dimensions of performance fit together.
By definition, ESG (environmental, social and governance) metrics take into account a variety of factors, from a company’s carbon footprint to its safety record to the diversity of its board. Yet even then, ESG is a rather narrow gauge—an examination of only the heart, if you will.
In a world of specialists, our aim is to offer the insights of the general practitioner by seeing the whole corporate anatomy.
A version of this article first appeared in The Wall Street Journal on Dec. 6, 2017.