This year’s edition of the Harvard Business Review’s ranking of “best-performing CEOs” is most notable for who’s not featured. Amazon head Jeff Bezos, the richest man on the planet and the most powerful CEO in the world according to Forbes—not to mention the fifth most powerful person, period—is conspicuously missing from the list.
HBR was acutely aware that Bezos’s absence would cast doubt on the metrics by which the ranking is compiled and included an explanatory paragraph to rationalize the omission. The purported justification, however, provokes more questions than it answers.
In terms of financial metrics alone—total shareholder return adjusted for both country and industry and change in market capitalisation throughout any given CEO’s tenure—Bezos would have topped the Harvard Business Review list every year since 2014. The admission that Bezos has consistently outperformed every single one of the world’s CEOs financially makes it baffling that he wouldn’t be considered one of the top 100 “best-performing” chief executives.
The explanation lies in the methodology underpinning this year’s list. In 2015, HBR stopped relying solely on financial performance to establish its ranking, but factored environmental, social and governance (ESG) ratings into the mix. Each CEO is given an ESG score from two third-party data providers—Sustainalytics and CSRHub. These scores were weighted at 15% each for the 2019 Harvard Business Review ranking, with financial metrics counting for 70%.
Despite his chart-topping financial stats, Sustainalytics put Bezos’s ESG scores so low that he was bumped off HBR’s list entirely. HBR didn’t give many details about Sustainalytics’ reasoning, but specifically named the “risks created by [Amazon’s] working conditions and employment policies”. With the HBR list coming out in the wake of a spate of bad press—a growing number of Amazon workers have walked off the job to demand higher wages and better working conditions—there’s the question of whether Sustainalytics’ low ESG scores for Amazon were influenced by the prevailing trend in public opinion.
The sharp dichotomy between Amazon’s financial success and the low ESG scores which excluded it from the CEO ranking points to broader questions about HBR’s decision to rely so heavily on results from Sustainalytics and CSRHUB. ESG is a trendy buzzword in the business world, and investors are indeed increasingly looking at how diverse, ethical or climate-conscious companies are when making investment decisions. These metrics, however, would arguably be better highlighted in a separate ranking of CEOs, rather than muddying HBR’s picture of the “best-performing” executives—not to mention the fact that, as the Financial Times noted, it’s “debatable how much of a company’s ESG practice […] is directly attributable to the CEO”.
What’s more, the major ESG analytic firms—including Sustainalytics and CSRHUB—have drawn substantial criticism for what the Financial Times dubbed their “wildly diverging standards and inherent biases”. As an executive at global investment titan BlackRock noted, investors have learned to discount these types of ratings: “Like most observers, we expected that an ESG-friendly profile would be associated with better social performance. We were wrong.”
A report by think tank ACCF found that not only have Sustainalytics and its competitors failed to develop uniform criteria for the firms they rate, their ESG assessment of companies demonstrated any number of biases. ESG ratings apparently are skewed based on factors including the size of companies, their geographical location, and the industry they are in.
These biases often result in head-scratching results: Sustainalytics, for example, ranked electric car giant Tesla’s ESG score in the 38th percentile among auto manufacturers—while placing Volkswagen, recently taken to task for a massive environmental violation, in the 93rd percentile. Sustainalytics competitor MSCI, meanwhile, ranked Tesla at the absolute top of its ESG classification of auto manufacturers—going to show how significant the variations are between the market leaders in ESG analysis.
These puzzling variations were readily apparent in the Harvard Business Review’s list, as well. LVMH CEO Bernard Arnault (misspelled in the list as “Bernard Arnaut”), for example, was ranked tenth this year. Arnault, the richest person in Europe and the fourth-richest in the world, had superlative financial performance—under HBR’s old methodology, which exclusively considered financial success, Arnault would have been ranked third. He was bumped down the list, however, due to a peculiarly mediocre Sustainalytics score—more than two times lower than his CSRHUB score.
Arnault’s case highlights another wrinkle in HBR’s system. Since the 2019 list came out, a number of articles in the fashion press noted that Arnault had supposedly been leapfrogged by rival François-Henri Pinault, who had ranked below the LVMH executive last year. This ignores an essential point, however, which the Harvard Business Review does not emphasize enough in its writeup: the methodology changed—specifically the weight given to ESG ratings—this year, making comparisons between the 2018 and 2019 lists near-worthless.
The change in methodology is responsible for a number of the most noticeable movements between the 2018 and 2019 rankings, and has served to skew the list towards certain industries which are more naturally geared towards sustainable practices. Ignacio Galán of Basque utility Iberdrola shot from 36th place in 2018 to 5th place this year—given that Iberdrola is the world’s number one producer of wind energy, Galán unsurprisingly benefitted from the increased focus on environmental impact. Microsoft head Satya Nadella, with consistently middling financial performance but an excellent CSRHUB ranking, shot from 46th place in 2018 to 9th this year. The IT and financial services sectors have particularly benefitted from the new approach: in 2018, only three of the top ten CEOs were from these two sectors. In 2019, seven out of ten were.
The Harvard Business Review has emphasized that its ranking of CEOs is “meant to be a measure of enduring success” and that “in a business world that often seems obsessed with today’s stock price and this quarter’s numbers, our ranking takes the long view”. Unfortunately, the increased weight given to ESG rankings risks undermining that long-term perspective.