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Warning Signs for Some of the Best-Managed Companies -- Journal Report

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11/22/2019 | 10:47am EST

By Chris Kornelis

Even the best-managed companies have Achilles' heels.

Among the top 100 U.S. companies in the Management Top 250 ranking, eight have a "red flag" in one of the Drucker Institute's five categories of corporate effectiveness, meaning they fall below the 25th percentile in customer satisfaction, employee engagement and development, innovation, social responsibility or financial strength.

Only two of the red flags for these eight companies are in financial strength, but Rick Wartzman, head of the Drucker Institute's KH Moon Center for a Functioning Society, says a flag in any category has implications for a company's bottom line if the issues it raises are left unaddressed. All the categories are interrelated, he says.

"Over time, if you have particularly weak customer satisfaction, odds are you're not going to be a very financially strong company," he says. "If you don't innovate, you're not going to have good customer satisfaction. If you don't have engaged employees, you're not going to have customer satisfaction or much innovation. We know that all these things are bound up together."

Here's a look at the issues behind the red flags for these top-100 companies.

Chevron Corp.

Red Flag: Customer Satisfaction

The energy giant landed in the 13.7th percentile for customer satisfaction. One indicator Drucker considered that weighed down the company's score in the category was Chevron's score from wRatings Corp., which measures how well a company meets customer expectations.

Gary Williams, chief executive of wRatings, says that in many ways Chevron's score is an indication of the way consumers view the energy industry, which many associate with environmental damage and global warming. Mr. Williams says he has yet to see an energy company redefine itself the way, say, Waste Management Inc. was able to identify itself more closely with recycling than landfills. He sees that as a missed opportunity for Chevron and its competitors.

"You can reset" expectations, Mr. Williams says. "And if you're a market leader, that's what you do."

In a statement, Chevron said: "While we are not clear on the Drucker Institute's methodology, we know that direct market research demonstrates consistently that both the Chevron and Texaco brands score very highly with customers relative to the industry, particularly when it comes to fuel quality, the appearance of stations, and the customer service provided while there."

Cummins Inc.

Red Flag: Customer Satisfaction

The engine manufacturer's customer-satisfaction score, which put it in the 22.5th percentile, was also dragged down by a low score from wRatings. Mr. Williams says Cummins typically puts up better numbers, but he believes a dragged out recall of trucks because of problems with Cummins engines took its toll this year.

In a statement, Cummins said: "Cummins prides itself on helping our customers be as successful as possible by delivering excellent sales, service and support....We are committed to delivering on our brand promise and are taking the necessary steps to ensure we provide a positive experience for our customers."

Facebook Inc.

Red Flag: Customer Satisfaction

Facebook is in the 21.6th percentile for customer satisfaction, a ranking driven largely by its score from J.D. Power on customers' willingness to recommend Facebook to a friend or colleague. Overwhelmingly, consumers asked by J.D. Power say they aren't likely to recommend Facebook.

Michael Vermillion, vice president of global business intelligence at J.D. Power, says this question essentially asks consumers how willing they are to stand up for a company publicly. In this regard, he says Facebook trails social-media colleague Twitter, which he likens to McDonald's trailing some of its major competitors: "Even if they like the french fries, people aren't willing to put their personal reputation on the line" to recommend the brand.

A Facebook representative didn't respond to requests for comment.

Philip Morris International

Red Flag: Customer Satisfaction

The tobacco company that sells Marlboro outside the U.S. is in the 0.6th percentile for customer satisfaction. The score was affected by a number of indicators. Put simply, Mr. Williams says, given the health concerns around tobacco, "it's going to be really difficult to get people to like you as a company."

A representative for the company said: "Philip Morris International has been very clear about our smoke-free vision -- to create a world without cigarettes. PMI is undergoing a massive transformation to shift our business entirely out of conventional cigarettes to scientifically substantiated smoke-free products -- those that don't burn or contain tobacco -- that are better choices than continued smoking, the most harmful form of tobacco use."

Walmart Inc.

Red Flag: Employee Engagement and Development

Walmart is in the 23.1st percentile for employee engagement and development in large part due to its job-satisfaction score from PayScale Inc.

In a statement, Walmart said: "We are proud to offer some of the best jobs in retail, and the opportunity to grow a career. In the past four years we have significantly invested in wages, benefits, training, and education for our associates."

Kelly Tang, the Drucker Institute's senior director of research, says improved compensation has shown up in Walmart's scores. "What we don't know," she says, "is whether there's simply a lag -- and job satisfaction will start to catch up with the higher pay. Or it might reflect some other, lingering issues that affect morale, which Walmart has yet to address."

UnitedHealth Group

Red Flag: Customer Satisfaction

UnitedHealth Group scored in the 18.9th percentile for customer satisfaction. Its score was driven heavily by low scores in J.D. Power's customer-satisfaction index and from wRatings. Mr. Williams says insurance companies often score low on customer satisfaction, adding that "there are few insurance companies, I think, that are liked." But UnitedHealth's scores, he says, have been low enough for long enough that he believes they reflect more than general consumer views of the industry.

In a statement, the company said: "At UnitedHealth Group we are driven by a clear vision, grounded in achieving the triple aim of improved outcomes, lower costs and a better health-care experience. Improving health-care experiences for everyone is one of our core focus areas, and we have developed a rigorous feedback system across our various businesses dedicated to listening and responding to our customers and members. UnitedHealth Group uses the Net Promoter System as a proven operating discipline to help raise quality, deliver value and simplify the health-care experience. While we have made progress, we know we have more work to do."

General Electric

Red Flag: Financial Strength

One of the indicators that pulled down General Electric's financial-strength rating -- which put it in the 2.3rd percentile -- is its score on economic profit from ISS EVA. Economic profit is a measure of a company's operating earnings minus the opportunity cost of the capital tied up in its business.

Anthony Campagna, ISS EVA's global director of fundamental research, says steps GE has taken to stabilize "since the wheels fell off at the height of the financial crisis" haven't been enough.

"Even as they've divested businesses and tried to right-size the GE balance sheet, they haven't been able to be more efficient with the assets that are left over," he says. "They've communicated that this is going to be a process [that is] not going to happen overnight. And that's taken into account. But what we can measure is what they've done, and what they've done is fail to earn above their cost of capital."

A GE spokesperson said: "We have enormous opportunities to drive sustainable performance improvements across GE and within each of our businesses. We are making progress improving our financial position and strengthening our businesses, which will show up over time in our financial results. We remain confident that we will unlock value for GE's stakeholders as our transformation accelerates."

Workday Inc.

Red Flag: Financial Strength

Workday's position in the 13.6th percentile for financial strength is also largely a product of its score in the ISS EVA economic-profit metric. "Through our lens, they earn below their cost of capital," says Mr. Campagna.

He attributes Workday's low score in part to the company's heavy investment in research and development, which he says hasn't "given investors the required rate of return to justify that level of investment just yet."

Workday didn't respond to requests for comment.

Mr. Kornelis is a writer in Seattle. He can be reached at reports@wsj.com.

Corrections & Amplifications

This article was corrected at 4:30 p.m. ET because an earlier version quoted a representative for Philip Morris International as saying the company is shifting to smoke-free products "that don't heat or contain tobacco" in the 24th paragraph, but after the article was published, the representative said he had misspoken.

Stocks mentioned in the article
ChangeLast1st jan.
CHEVRON CORPORATION -0.12% 118.64 Delayed Quote.9.21%
CUMMINS INC. -1.43% 182.12 Delayed Quote.36.27%
FACEBOOK -1.20% 194.4336 Delayed Quote.50.09%
GENERAL ELECTRIC COMPANY -0.39% 11.39 Delayed Quote.51.12%
PHILIP MORRIS INTERNATIONAL 0.16% 84.185 Delayed Quote.25.90%
UNITEDHEALTH GROUP 0.60% 285.32 Delayed Quote.13.84%
WALMART INC. -0.02% 119.735 Delayed Quote.27.75%
WORKDAY INC. -0.04% 159.575 Delayed Quote.0.04%
WTI 0.40% 59.82 Delayed Quote.30.11%
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