By Rick Wartzman and Kelly Tang | Jan. 25, 2024 11:00 am ET
Executives who consider environmental, social and corporate-governance criteria have been under attack lately, accused by critics of practicing “socialism,” or trying to act “woke.”
But our latest analysis, based on a gauge of corporate effectiveness from the Drucker Institute at Claremont Graduate University, suggests that those who are integrating ESG considerations into their business are guilty of nothing more than good management.
The institute’s model, which is rooted in the core principles of the late management scholar Peter Drucker, measures how companies fare across five areas through standardized scores with a typical range of 0 to 100 and a mean of 50: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength. Those categories are then rolled up into a cumulative score that captures overall effectiveness—defined by Drucker as “doing the right things well.”
The results underpin the Management Top 250, an annual ranking produced in partnership with The Wall Street Journal. The 2023 list, published in December, was drawn from a total universe of 794 companies that we evaluated through the lens of 34 separate indicators. Bendable Labs, a private firm, works with the institute to make the calculations and interpret them.
The power of ESG
In our latest research, we took a look at the 50 biggest gainers in overall effectiveness since 2018, among a group of 442 companies for which we have data going back that far, to determine what had propelled their scores higher.
For the 50 biggest gainers, the leading factor in their rise was the social responsibility category, which is made up of metrics from several ESG ratings providers. Over the five-year period, their scores in that area rose on average 8.9 points on our 0 to 100 scale, compared with 8.3 points in financial strength, 6.9 in customer satisfaction, 6.5 in employee engagement and development, and 4.9 in innovation.
That these big gainers had increases across the board isn’t surprising. Our model rests on the notion that all five dimensions influence each other over time—what social scientists call “reciprocal causation.” Earlier research, using a technique known as “seemingly unrelated regressions,” showed that companies can boost their score in one category by lifting up their score in another.
The exact relationship between social responsibility and the other four areas in our model varies from industry to industry and company to company. But “in general, better responsibility and better sustainability means better cash flow, better risk management and better value creation,” says R. Paul Herman, the CEO of HIP Investor, which is one of the suppliers of data for the rankings.
Part of a puzzle
Steve MacMillan, chief executive officer of the medical products maker
Hologic, is certainly convinced that this is the case. From 2018 to 2023, the company had an upswing of 5.4 points in customer satisfaction, 2.3 in employee engagement and development, 10.6 in social responsibility, 4.4 in innovation and 5.5 in financial strength. “They’re really all puzzle pieces,” he says.
MacMillan, who became CEO of Hologic in late 2013, says that when it comes to ESG, he has always been “slow to embrace the term but fast to embrace the concept.” Over the past five years, the company has raised the pay of its factory workers, committed to cutting waste and greenhouse-gas emissions, and assembled a more-diverse senior management team and board—all moves that are reflected in its higher social responsibility score.
In turn, each of these undertakings—along with a sharp focus on improving women’s health around the globe—has had a significant impact on driving engagement across the company and spurring innovation, according to MacMillan. “Our employees are so connected to our purpose,” he says. Visit The Wall Street Journal for the full article.
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