By Rick Wartzman and Kelly Tang
"What in the world were you thinking?"
More than any other reaction -- though often in terms not quite
so polite -- that's what we heard last year after General Electric
Co. came in at No. 18 out of 752 large, publicly traded companies
that we ranked using the Drucker Institute's measure of corporate
effectiveness. Roughly the upper third of the firms that we
evaluate each year make up the Wall Street Journal Management Top
250, which had its debut in December 2017.
At the time, GE was in a tailspin. The company was on its third
chief executive in two years. Its balance sheet was in shambles,
and its dividend had been slashed. What's more, GE had just
disclosed that federal prosecutors had opened a criminal probe into
its accounting practices. GE has denied wrongdoing and said it is
cooperating with the investigation.
Surely, the fact that GE landed in such a lofty spot on our list
meant that our entire model was flawed.
Actually, not at all -- and more on that in a minute. But the
reaction helped lead to what we hope will be a welcome, if simple,
change to this year's presentation: a visible "red flag" warning
given to any company in the Management Top 250 that scores in the
bottom 25% of our larger universe of assessed firms in any of the
five areas that we explore: customer satisfaction, employee
engagement and development, innovation, social responsibility and
Roots of imperfection
Developed and tested over four years, our rankings are designed
to reveal how effectively a company is managed according to the
core principles of the late Peter Drucker, a professor, consultant,
author and longtime Wall Street Journal columnist. Mr. Drucker
defined "effectiveness" as "doing the right things well."
For our 2019 analysis, we examined 820 companies in all, using
34 indicators across the five categories. Corporations are compared
in each of the categories, as well as in their overall
effectiveness, through standardized scores with a range of 0 to 100
and a mean of 50. (Our methodology, data sources and other details
can be found here.)
So why do we sometimes miss the mark?
It could be because of a time lag. Many of the metrics that we
use in our model are collected by our data providers months in
advance of when the year's rankings are published.
But there are also bigger issues at play. For one thing, our
rankings fall into the realm of management science. By this
criterion, our model is highly dependable and durable. The
statistical correlations among the variables that we track are very
strong and indicate that a holistic appraisal of corporate
effectiveness can, in fact, be derived from the data. Still, that
doesn't mean that our system captures every factor -- or even most
factors -- that lead to an individual company's success or
Indeed, it should worry you if we got it right 100% of the time.
That would be magic, not science.
For another thing, most of the companies we rank don't perform
evenly across the five categories, and an outstanding showing in
one area can lift a firm's overall effectiveness score, obscuring
This is, in part, why we wanted to highlight with a red flag
those companies with extremely low scores in any given dimension.
It's a signal that at least one aspect of a company's operations
may be misfiring so badly it could undermine the whole
Had we used red flags last year, GE would have been slapped with
one. Its total effectiveness score was 74.2, putting it in the top
2% of all the companies that we scrutinized. This was driven, to a
great degree, by an astronomical innovation score of 109.9, which
was in the top 1% of all firms. Yet its financial-strength score
was plainly in the danger zone; at 38.6, it was in the bottom 7% of
the companies we covered.
As we move forward, we will keep looking for ways to improve our
model while continuing to adhere to Mr. Drucker's key tenets. In
addition to the red flags, we made a major change this year in how
we calculate financial strength by leaning heavily on a set of
metrics related to economic value added. EVA gauges a company's
underlying "economic profit" -- its operating earnings minus the
opportunity cost of the capital tied up in its business -- not its
"profit" in a purely bookkeeping sense, offering insight into how
well the business is managed.
The revision made the correlations throughout our
financial-strength category even more robust than they were
It also reaffirmed GE's precarious position in this area. The
company, which slipped to No. 100 in the rankings, is now in the
bottom 2% of all firms in financial strength, with a score of just
32.2. And that made it among 54 companies in the Management Top 250
to earn a red flag.
Mr. Wartzman is the head of the KH Moon Center for a Functioning
Society, a part of the Drucker Institute, and Ms. Tang is the
institute's senior director of research. Email them at
(END) Dow Jones Newswires
November 22, 2019 10:45 ET (15:45 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
General Electric (NYSE:GE)
Historical Stock Chart
From Sep 2020 to Oct 2020
General Electric (NYSE:GE)
Historical Stock Chart
From Oct 2019 to Oct 2020