By Rick Wartzman and Kelly Tang

Long before the phrase "stakeholder capitalism" had left anyone's lips, Peter Drucker urged companies to balance a variety of interests -- for "management to look at the institution from different angles" and ably serve customers, employees, shareholders and society.

But the author, professor and corporate consultant also taught that most every enterprise is better at some things than others, and that leaning into your strengths is crucial. "Core competencies," Drucker wrote, "define where an organization must excel in order to maintain leadership."

A new study from researchers at the University of Bern in Switzerland suggests that taking a "both and" approach -- managing holistically, yet clearly excelling in certain areas over others -- is what leads to the richest investment returns.

"It's about where you have strategic advantage," says Jonathan Matzinger, who is part of the team in Bern.

Drucker's principles

The findings are based on a measure of corporate effectiveness, which was created by the Drucker Institute at Claremont Graduate University and forms the foundation of the Management Top 250, an annual ranking produced in partnership with The Wall Street Journal. Bendable Labs, a private firm, works with the institute to perform the calculations and interpret them.

The model, which is rooted in Peter Drucker's central principles, uses 35 metrics to evaluate five categories of performance: customer satisfaction, innovation, social responsibility, employee engagement and development, and financial strength.

Companies are compared in each of these five areas, as well as in their overall effectiveness, through standardized scores with a range of 0 to 100 and a mean of 50. Effectiveness, according to Drucker, is "doing the right things well."

The Management Top 250 for 2024, published in December, represents the best-scoring 30% of a bigger universe of 842 prominent, publicly traded U.S. corporations.

For the Bern study, researchers used historical data from the Drucker rankings, going back to 2013, to construct investment portfolios with distinctive characteristics. (All of the companies used in the study were part of the S&P 500 stock index.)

Two of these baskets of equities -- each containing 15 stocks -- started from the same place: looking at those companies with the highest overall effectiveness scores from the prior year. But the selections for one portfolio were then refined to include a group whose individual category scores had a relatively large amount of variation, as determined by an algorithm, while the other portfolio was composed of companies that scored more consistently across categories.

The researchers updated the portfolios every year through 2023 with new companies that met the criteria, while reinvesting the gains they made along the way.

Over the 11 years examined, the portfolio with more variation had a significantly greater average total annual return than the other did -- 20% versus 15.1%. By comparison, the average total annual return for the S&P 500 during that span was 13.8%.

Zach First, a former executive director of the Drucker Institute who is now a partner at Bain & Co., isn't surprised by the results. He often tells clients that while you must generate value for all stakeholders, that doesn't mean management should give everything equal weight. "You have to make choices," First says.

He has noted that Costco Wholesale was built on giving priority to its customers, its employees and its suppliers -- "pretty much in that order, " in the words of former CEO Jim Sinegal, while Virgin Group founder Richard Branson placed the emphasis elsewhere. "If you can put staff first, your customer second, and shareholders third, effectively, in the end the shareholders do well," he has said.

The trick is to avoid going so far in any one direction that other parts of the operation become unduly neglected. "If you're too inconsistent," says First, "you introduce risks."

They're all connected

Indeed, all of the categories in the Drucker rankings are interrelated, which is why in 2019 we started to assign a "red flag" to any company that falls within the bottom 25% in any category, no matter how well it scores overall. This is also why, in putting together an index derived from the Drucker rankings to track effectively managed companies, S&P Global decided to take the 100 most consistent scorers from the 200 highest overall scorers.

Matzinger agrees that, while the Bern study makes the case that management should double down in areas where a company is exhibiting the utmost success, no firm can afford to falter too severely in any area. "That can come back to bite you," he says.

In addition to assembling the portfolios with different levels of variation, Matzinger and his colleagues also computed the average total annual returns for the 15 highest scoring companies in each separate Drucker category, save for financial strength. Over the 11 years, the employee engagement and development portfolio eclipsed all others, at 21.3%.

"The thing that seems to be driving value is how the workforce is engaged," says David Sprott, dean of the Drucker School of Management in Claremont and a contributor to the Bern study.

This outcome is consistent with a recent analysis by the investment firm FoW Partners, which showed that companies in the top 20% of its "Good Job Score" assessment had twice the share price return of those in the bottom 20% over the previous 12 months.

If one lesson for executives from the Bern study is that "you've got to pick your spots," Matzinger says, another is this: "Taking care of your employees might be a good spot to start."

Rick Wartzman is co-president and Kelly Tang is chief data scientist at Bendable Labs. They are also both senior research fellows at Claremont Graduate University. They can be reached at reports@wsj.com.

(END) Dow Jones Newswires

March 13, 2025 12:00 ET (16:00 GMT)

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