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.
All Rise
The 50 biggest gainers in overall effectiveness from 2018 to 2023, among 442 firms measured by the Drucker Institute, saw improvement in every category of corporate performance. Here are the average increases in their scores during that span using a 0-100 scale.
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 HOLX 0.36%increase; green up pointing triangle, 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.
Shelagh Glaser, the chief financial officer at Synopsys SNPS -1.59%decrease; red down pointing triangle, likewise doesn’t think it’s a coincidence that her company’s scores have gone up across all categories of the rankings over the past five years, with particularly large jumps in customer satisfaction (16.1 points), social responsibility (8.7) and innovation (6.9). “We see the interrelatedness,” she says.
Synopsys makes software that engineers use to design and test silicon chips, which then wind up in data centers, autonomous vehicles and an enormous array of other places and products. A central challenge for Synopsys is helping its customers enhance the performance of their technology while, at the same time, consuming less energy. “Managing that push and pull,” says Glaser, is “tricky business.”
Because solving this conundrum is good for the environment, it tends to be all the more motivating for Synopsys employees to tackle. “It brings out a lot of creativity,” Glaser says.
Meanwhile, one way the company sparks innovation is by reducing its own carbon footprint through sustainability initiatives internally and across its supply chain. To garner insights that can help customers, explains Glaser, “we need to be living it ourselves.”
Resonating with employees
CF Industries CF 0.70%increase; green up pointing triangle, a manufacturer of fertilizer, is another believer in taking a holistic approach. The company has seen its scores ascend in every category in our model over the past five years—up 12.1 points in customer satisfaction, 7.3 in employee engagement and development, 4.4 in innovation, 10.8 in social responsibility and 27.2 in financial strength.
Unless you keep a close eye on all of these areas, says CEO Tony Will, “you’re not going to be long for this world.”
For CF, the line between social responsibility and other areas has become especially clear. As the company has set goals to cut the intensity of its carbon emissions by 25% by 2030 and to be net zero carbon by 2050, the workforce has demonstrated great interest in being involved.
“Doing the right thing has absolutely resonated with our employees and made them feel proud,” Will says. He adds that it has also “led to the spirit of innovation,” which has opened up new markets.
Over the past couple of years, by capitalizing on the expertise and technology it has built up through its own decarbonization efforts, CF has been able to enter into a series of agreements to help other industrial companies become greener. Among them: JERA, the biggest power company in Japan, and steelmaker Posco Holdings 005490 2.55%increase; green up pointing triangle and Lotte Chemical 011170 -0.07%decrease; red down pointing triangle in Korea.
Peter Drucker once remarked that “every single social and global issue of our day is a business opportunity in disguise.” As it turns out, though, plenty of social and global issues are business opportunities in plain sight.