New research from the Drucker Institute, published in the WSJ, applied the Institute’s analytical framework to assess companies’ “effectiveness,” defined for this purpose as “doing the right things well.” Notably, the authors of the article find a harmonious congruence—or is it a “harmonic convergence”?—between the “indicators” of effectiveness that make up their model and the various commitments for the benefit of all stakeholders in the Business Roundtable’s new Statement on the Purpose of a Corporation.” What’s more, the authors suggest that their own framework was created to promote exactly “the kind of stakeholder mind-set that the Business Roundtable has now endorsed.” With that in mind, the authors highlight the group of companies led by CEOs who signed the BRT Statement to see how well these companies fared. While some have viewed the BRT Statement as mere “virtue signaling” (see the SideBar below), the article sets out to measure the extent to which the signatories put their money where their mouths are. How did they do? “Quite well,” but with “notable room for improvement.”

You might recall that, in August, the Business Roundtable announced the adoption of a new Statement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs. What was newsworthy was that the Statement moved “away from shareholder primacy”—the idea that corporations exist principally to serve shareholders —as a guiding principle and outlined in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. As you probably recall, the concept of “shareholder primacy” has been widely attributed to the Chicago school of economists, beginning in the 1970s, with economist Milton Friedman famously arguing that the only “social responsibility of business is to increase its profits.” According to the press release, the Business Roundtable has had a long-standing practice of issuing Principles of Corporate Governance. Since 1997, those Principles have advocated the theory of shareholder primacy and relegated the interests of any other stakeholders to positions that were strictly “derivative of the duty to stockholders.” The new Statement supersedes previous statements and “more accurately reflects [the Business Roundtable’s] commitment to a free market economy that serves all Americans. This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” (See this PubCo post.)

While the BRT Statement drew praise and congratulations from many corners, needless to say, some were skeptical of the change in corporate attitude. For example, Bloomberg columnist Matt Levine called it “a pious letter saying that companies should consider the interests of all stakeholders and not just try to maximize shareholder value. I was skeptical of that letter. ‘It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation,’ I wrote, and I figured that the letter was a way for CEOs to justify giving shareholders less power.” And further, there “are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themselves. So when an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying.”

Similarly, (as reported in this article from Fortune), Anand Giridharadas, author of the book Winners Take All: The Elite Charade of Changing the World, said that he could

“‘absolutely see the change….It has become socially unacceptable as a company or a rich person not to be doing good. CEOs are asking the question: ‘What can I do to make the world better?’ But what many are failing to do is ask: ‘What have I done that may be drowning out any of the do-gooding I’m doing?’ He cites the 2017 tax bill, supported by the Business Roundtable, as an example. The lion’s share of the benefits, he argues, ended up in the hands of the top 1%, increasing the income inequality underlying many social problems. ‘What I see are well-meaning activities that are virtuous side hustles,…while key activities of their business are relatively undisturbed … Many of the companies are focused on doing more good but less attentive to doing less harm.’”

Last year, the Drucker Institute (which, together with the WSJ, also produces the Management Top 250 annual rankings) assessed 752 large, publicly traded companies by applying a framework of “37 indicators across five areas: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.” By comparison, the BRT commitments called for “‘meeting or exceeding customer expectations’; ‘investing in our employees’ by ‘compensating them fairly and providing important benefits,’ as well as offering training and education so they can ‘develop new skills for a rapidly changing world’; ‘dealing fairly and ethically with our suppliers’; ‘supporting the communities in which we work’; and ‘generating long-term value for shareholders.’”

To perform the assessment, the Institute compared companies in each of the five categories and in “overall effectiveness,” with a range of 0 to 100, and a mean of 50. Of the 181 companies with CEO signatories to the BRT Statement, 137 were included in the analysis. How did they do? Overall, the authors conclude, “on average, their performance was impressive, scoring in the top half of the 752 firms in every area that we explored.” On average, the BRT companies scored 53.1 in customer satisfaction, 53.0 in employee engagement and development, 57.2 in social responsibility and 53.6 in financial strength. For “overall effectiveness,” which adds “innovation performance” to the four categories above, the BRT companies’ scores averaged 57.4. What’s more, six of the ten companies that ranked highest overall were among the BRT companies.

But—of course there’s a “but”—many of the 137 BRT companies scored below the mean in critical areas, and sometimes well below. For example, 26 companies scored below 50 in—of all things—“social responsibility,” a category that the authors indicate is comparable to the BRT’s concept of “supporting the communities in which we work.” And six scored below 40, placing them in the bottom 20%. Similarly, in the category of “employee engagement and development,” 43 of the BRT companies scored below 50 and 10 scored below 40. Indicators in this category included wages, benefits and training. With regard to “customer satisfaction,” 56 BRT companies scored below the mean, and 13 were at 40 or below. And, surprisingly, 65 (almost half) scored below 50 in “financial strength,” with nine below 40. This category involves “generating long-term value for shareholders.”

The Institute also examined how well the BRT companies performed on these same measures over time: “[O]nce again, the outcomes were strikingly uneven. Using historical data from 2012, we found that most of the Business Roundtable companies have seen their scores rise in the different areas that we assessed, but not all of them. In the past six years, 36 have suffered a slip in social responsibility, 45 a decline in customer satisfaction, 52 a decrease in employee engagement and development and 67 a falloff in financial strength.”

While signing the BRT Statement was a “significant step,” the authors conclude, “now comes the hard part: turning this vision into something measurably meaningful.”