- Since the 1970s, U.S. corporate executives have emphasized shareholder value over stakeholder capitalism. This has lately come to be seen as overdone and unwise for a company’s longterm benefit. The intangible aspects of corporate performance emphasized by stakeholder capitalism are important factors in value creation.
- The Drucker Institute created an intangibles-focused model based on the principles of management theory’s definitive thinker, Peter Drucker, to assess corporate effectiveness in five dimensions: employee engagement and development, customer satisfaction, innovation, social responsibility, and financial strength.
- S&P Dow Jones Indices has combined the Drucker Institute’s four non-financial dimensions with S&P DJI’s definition of financial quality, the quality factor, to provide a holistic approach.
- The S&P Drucker Institute Corporate Effectiveness Index calculates a combined average score for each stock in the S&P 500®, then further selects the stocks with the best blend of combined average score and consistency across dimension scores.
- The index exhibits an improved risk/return profile compared with the S&P 500 and offers a uniquely differentiated approach to capture companies that reinvest in stakeholders.
This paper details the investment rationale and the construction of the S&P/Drucker Institute Corporate Effectiveness Index. This index is designed to measure the performance of companies in the S&P 500 using the Drucker Institute’s holistic model for valuing corporate intangibles based on managerial effectiveness.
The Drucker Institute is not alone in its work in this area. Among the most prominent current players is the Embankment Project for Inclusive Capitalism (EPIC), led by Ernst & Young and 19 of the world’s largest asset managers and owners, including Vanguard, State Street, and CalPERS. In 2018, EPIC wrote, “Nearly two decades into the 21st century, businesses worldwide are still reporting to financial markets based on accounting principles and concepts that were first codified in accounting standards in the 1970s to record financial transactions...Today, it is not uncommon that as little as 20% of a company’s value is captured on its balance sheet—a staggering decline from about 83% in 1975.”2
The EPIC report is a reaction to the period between the early 1970s and today, when shareholder capitalism overtook stakeholder capitalism as the most profitable business principle for corporations and their investors. From the 1940s through the 1970s, America’s leading executives spoke frequently about their responsibility to address the needs of all of their constituents. 3 However, by the early 1980s, buoyed by the theories of the University of Chicago’s Milton Friedman,4 the University of Rochester’s Michael Jensen,5 and other academics, “maximizing shareholder value” became the new standard.
As shareholder primacy took hold across the business landscape, evaluation of corporate performance was boiled down, in many respects, to a single number: a company’s daily share price. Although some still applaud “maximizing shareholder value” as consistent with a company flourishing over the long run, 6 this mindset often prompts executives to behave in short-sighted ways that reward them for trading long-term growth for short-term returns. 7