Page 38 - Harvard Business Review (November-December, 2017)

tenure: the country-adjusted total shareholder financial rank. Incorporating three metrics is a research firms and works mainly with companies
return (including dividends reinvested), which balanced and robust approach: While country- that want to improve their own ESG performance.
offsets any increase in return that’s attributable adjusted and industry-adjusted returns risk being We computed one ESG rank using Sustainalytics
merely to an improvement in the local stock skewed toward smaller companies (it’s easier to ratings and one using CSRHub ratings for every
market; the industry-adjusted total shareholder get large returns if you start from a small base), firm in our data set. To calculate the final ranking,
return (including dividends reinvested), which the change in market capitalization is skewed we combined the overall financial ranking
offsets any increase that results from rising toward larger companies. (weighted at 80%) and the two ESG rankings
fortunes in the overall industry; and change in To measure performance on nonfinancial (weighted at 10% each), omitting CEOs who left
market capitalization (adjusted for dividends, issues, HBR consulted with Sustainalytics, a office before June 30, 2017.
share issues, and share repurchases), measured leading provider of environmental, social, and HBR’s list of best-performing CEOs was
in inflation-adjusted U.S. dollars. governance (ESG) research and analytics that conceived by Morten T. Hansen, Herminia Ibarra,
We then ranked each CEO—from 1 (best) works primarily with financial institutions and and Urs Peyer. Previous rankings were published
to 898 (worst)—on each financial metric and asset managers, and with CSRHub, which collects, in HBR in 2010, 2013, 2014, 2015, and 2016, but
averaged the three rankings to obtain an overall aggregates, and normalizes ESG data from nine the methodology was updated in 2015.

CEOS WORLD 2017

IN THE

between physical stores and online shopping, and its company’s massive Web Services division generates
“proximity sourcing” system, under which more than its own solar and wind energy. And in the past two
half of production takes place close to home. This al- years Amazon has hired several seasoned sustain-
lows it to keep inventories low and jump on trends to ability executives, creating optimism about changes
get new merchandise into stores quickly. likely to come.
Measured on financial returns alone, Isla comes in Although all investors of course pay close at-
18th in our ranking; his company’s performance on tention to financial performance, there’s evidence
environmental, social, and governance (ESG) factors, that many are beginning to watch ESG measures
which count for 20% of a leader’s score, propelled carefully, too. Earlier this year Amir Amel-Zadeh of
him to the top spot. ESG-rating firms praise Inditex’s Oxford University’s Saïd Business School and George
transparency in managing, monitoring, and auditing Serafeim of Harvard Business School published the
its supply chain. The company encourages consumers results of a survey of 413 investment executives,
to bring worn-out clothing to its stores for recycling whose firms collectively manage $31 trillion in as-
(in Spain it runs an at-home-pickup recycling pro- sets. Half reported using ESG information because
gram), and the Join Life brand of Zara, its largest they believe it is material to investment performance,
chain, is produced using recycled fibers and with and nearly half said they believe that a company with
careful attention to the consumption of water and a high ESG score is a less risky investment. Today
other resources. money managers most frequently use ESG scores as
If we judged CEOs solely on the basis of finan- a negative screen—they decline to invest in compa-
cial performance—as we did prior to 2015—the nies that have very low scores—but the managers sur-
top-ranked leader would be Amazon’s founder, Jeff veyed said they expect that more investors will seek
Bezos, who topped the list in 2014 and has been the high-scoring companies over time and will use the
best financial performer in every subsequent year. scores to urge companies to do better. “Overall, the
Since 2015, when ESG ratings became a factor in our evidence in our sample suggests that the use of ESG
ranking, Bezos has climbed from #87 to #76 to #71. information is driven primarily by financial rather
To be sure, Amazon’s ESG ratings remain low: This than ethical motives,” the researchers write.
year 88% of global companies scored higher on ESG The CEOs listed in the following pages deserve
measures. But those ratings are improving. The praise for excelling in both arenas.

NOVEMBER–DECEMBER 2017 HARVARD BUSINESS REVIEW 67