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Reprint: R1301F

For years, people have bemoaned executives zealous focus on short-term results, which often leads CEOs to make moves that undermine their firms long-term prospects and, some say, act irresponsibly. But all the talk wont change anything if the business world doesnt adopt a new way of measuring performance. Three professors from Frances Insead believe they have the answer: an innovative scorecard that evaluates CEOs on the basis of the results they delivered over their entire tenures in office. It incorporates three metrics: industry-adjusted shareholder returns, country-adjusted shareholder returns, and increase in market capitalization over that time frame.

Using this scorecard, the authors have studied and objectively ranked the performance of thousands of CEOs of major corporations around the world. In this issue, we reveal who made it into the top 100. This is the second installment of the ranking, which we published for the first time three years ago. Since then, the authors have expanded the group of CEOs studied, making it even more global. And, recognizing the growing sentiment that great financial performance is no longer enough, they also looked at social and environmental ratings to see which of the top CEOs also did well on those metrics.

Accompanying this years list is an interview with Jeff Bezos, the CEO of Amazon, whose well-known focus on the long term has served his company extremely wellearning him the #2 spot in the ranking.

It’s no accident that chief executives so often focus on short-term financial results at the expense of longer-term performance. They have every incentive to do so. If they don’t make their quarterly or annual numbers, their compensation drops and their jobs are in jeopardy. Stock analysts, shareholders, and often their own boards judge them harshly if they miss near-term goals. And without equally strong pressure to manage for a future that stretches beyond 90 or 180 days, CEOs’ behavior is unlikely to change. Developing a simple yet rigorous way to gauge long-term performance is crucial; after all, in business, leaders default to managing what’s measured.

Five years ago we launched a global project to address that challenge. But we wanted to do more than just devise the right metrics. Our goal was to implement a scorecard that would not only get people talking about long-term performance but also alter the way that boards, executives, consultants, and management scholars thought about and assessed CEOs. We wanted this innovation to shine a spotlight on the CEOs worldwide who had created long-term value for their companies, and we wanted to give executives around the world critical benchmarks they could aim for.

Three years ago, in the January–February 2010 issue of HBR. we introduced such a scorecard. It evaluated chief executives on their entire tenure in office. We used it to rank the performance of nearly 2,000 CEOs. This month we are publishing a new version of that analysis. We have expanded it along two important new dimensions—making the group of CEOs we studied truly global, and examining which CEOs and companies were able to do well not only financially but also in terms of corporate social performance.

Judging CEO Performance

For the most part, we used the same methodology that we did three years ago. (See the sidebar “How We Created the Scorecard.”) We wanted to accomplish three things:

Assess the long-term performance of each CEO, from the first day on the job to the last.

(Or for CEOs still in office, until August 31, 2012, our last day of data collection.) To do this, we looked at how much total shareholder returns had changed over that time period (adjusting for country and industry effects), plus the overall increase in market capitalization.

Reflect the global nature of business.

In 2010 we drew candidates from the S&P Global 1200 and BRIC 40 lists; this year we worked with three other emerging-market indexes as well. The pool of CEOs studied increased by roughly one-third, from 1,999 in 2010 to 3,143 this year.

Be objective.

Other rankings use reputation and surveys, which tap into popularity and celebrity status, to score CEOs. Instead, we use only performance data—notably, total shareholder performance. Other metrics, such as sales, profitability, and innovation rates, are useful, too, but they differ by industry, which makes comparisons difficult.

How We Created the Scorecard

We selected the CEOs we tracked from the following indexes:

• S&P Global 1200, 1997–2010

• S&P CNX 500, 1998–2010 (for India)

• Shanghai and Shenzhen Stock Exchanges, 1998–2010

• MSCI Emerging Markets Latin America Index and AmricaEconoma 500, 2002–2010

• S&P BRIC 40, 1997–2010

To make sure we had reliable and sufficient data, we excluded CEOs who had assumed their role before 1995 or after August 31, 2010. (For example, Tim Cook of Apple is not eligible because he became CEO in 2011.) And we included only those whose tenure lasted more than two years. All told, we ended up with 3,143 CEOs from 1,862 companies, of whom 1,007 were still in office on the date we stopped measuring performance. The entire group represented 64 nationalities and came from companies based in 37 countries.

Metrics.

We pulled financial data from Datastream and Worldscope and calculated daily company returns for the entire length of each CEO’s tenure (or until August 31, 2012, if the CEO was still in office). We calculated three sets of numbers:

Country-adjusted company returns.

We computed a company’s total shareholder return (including dividends reinvested) for the CEO’s tenure. We then computed the average return for other firms from the same country over the same period and subtracted that figure from the company’s return. This measure thus excludes any increase in stock return that is merely attributable to an improvement in the general stock market of a country.

Industry-adjusted company returns.

We also deducted the average return for the industry, to exclude any increases that were the result of rising fortunes for the overall industry.

Market capitalization change.

We measured the change in the company’s equity market capitalization over the CEO’s tenure. We adjusted this figure for inflation in each country and translated values into U.S. dollars, using 2011 exchange rates. We added to this number the inflation-adjusted value of the dividends and shares repurchased, and subtracted the adjusted value of shares issued.

We then ranked all CEOs for each metric—from 1 (best) to 3,143 (worst)—and calculated the average of the three rankings for every CEO to create the final overall ranking. Using three metrics is a balanced and robust approach: While the first two metrics risk being skewed toward smaller companies (it’s easier to get large returns if you start from a small base), the third is skewed toward larger companies.

Analysis.

We performed regression analysis on the data set of 3,143 CEOs. This allowed us to “control” for some factors and isolate the effect that one factor (such as having an MBA) had on a CEO’s standing in the ranking. Significant effects are reported in this article.

Nana von Bernuth, project manager, led the effort to create and analyze the ranking.

Granted, one downside of using truly objective measures is that our ranking may not exclude CEOs who have disappointed stakeholders on dimensions where performance is more subjective. This can be especially challenging with CEOs from emerging markets where rules are still being established. But even though CEOs are held accountable in areas that shareholder performance cannot capture, it remains the principal standard by which they are judged.

Who’s Up, Who’s Down

The top 100 CEOs on our list performed exceptionally well. On average, they delivered a total shareholder return of 1,385% during their tenures and increased their firms’ market value by $40.2 billion (adjusted for inflation, dividends, share repurchases, and share issues). The contrast between their results and those of the bottom 100 CEOs was striking: On average, the bottom 100 produced a total shareholder return of -57% and presided over a loss of $13.6 billion in market value.

It comes as no surprise that the best-performing CEO over the past 17 years was Steve Jobs of Apple, who was #1 on our 2010 list as well. From 1997 to 2011, Apple’s market value increased by $359 billion, and its shareholder return experienced average compound annual growth of 35%. That remarkable accomplishment is likely to go unbeaten for a long time.

Jeff Bezos of Amazon.com has now climbed to the #2 spot, up from #7 in our 2010 list. Under his leadership, the company delivered industry-adjusted shareholder returns of 12,266% and saw its value increase by $111 billion. In recent years the online retailer has expanded aggressively into new segments such as cloud-based computing services, while working to get the most out of the markets it already occupies. Its revenue growth shows no signs of slowing: Sales increased by 40% in 2011.

“You Have to Be Willing to Be Misunderstood”

Bezos Photography: Karem Moskowitz

Jeff Bezos’s focus on consumers above shareholders has at times vexed Wall Street. But smart investors have stayed with his company. In 16 years as CEO of Amazon, the online retail giant he created, Bezos has delivered industry-adjusted shareholder returns of 12,266%, and the value of the company has grown by $111 billion.

Bezos took time to speak with HBR’s editor in chief, Adi Ignatius, last November 26—Cyber Monday, which set an all-time record for online sales, a category Amazon practically invented. Edited excerpts from the interview follow.

HBR: When Amazon went public, in 1997, you wrote a letter to shareholders that said, “It’s all about the long term.” Did you feel you were challenging orthodoxy?

Bezos: We were trying to make sure we were correctly advertising the event. Warren Buffett once said, “You can hold a rock concert or you can hold a ballet. Just don’t hold a rock concert and advertise it as a ballet.” A public company has to be clear about whether it’s holding a rock concert or a ballet, and then investors can decide if they want to opt in.

What does it mean from the perspective of a CEO to think long-term?

If you’re long-term oriented, customer interests and shareholder interests are aligned. In the short term, that’s not always the case. We have other stakeholders, too—our employees, our vendors. We take it as an article of faith that if we put customers first, other stakeholders will also benefit, as long as they’re willing to take the long-term view. And a long-term approach is essential for invention, because you’re going to have a lot of failures along the way.

You’ve said that you like to plant seeds that may take seven years to bear fruit. Doesn’t that mean you’ll lose some battles to companies that have a more conventional, two- or three-year outlook?

Maybe so, but if we had always needed to see significant financial results in two or three years, then some of the most meaningful things we’ve done would never have been started—like Kindle, Amazon Web Services, Amazon Prime.

How much do you care about your share price?

I care very much about our shareowners, so I care very much about our long-term share price. I do not follow the stock on a daily basis, because I don’t think there’s any information in it. The economist Benjamin Graham once said, “In the short term, the stock market is a voting machine. In the long term, it’s a weighing machine.” We try to build a company that wants to be weighed, not voted on.

Does it make sense for Amazon to stay in the hardware business, which is a low-margin, low-profit area for you?

Our approach is to sell our hardware—our Kindle devices—at near breakeven. Then we have an ongoing relationship with customers who buy content from us: digital books, music, movies, TV shows, games, apps. We aren’t trying to make $100 every time we sell a Kindle Fire, so we don’t have to get you on the upgrade treadmill.

You have said that you would be interested, if you had the right concept and approach, in creating a physical Amazon retail experience. Why even consider that?

We like to build innovative things, but only if we can put our own unique twist on them. If we could find something differentiated that we thought customers would like, it would be superfun.

Would developing a phone fall into that innovative category?

Yeah, absolutely.

Who do you fear is your biggest challenger?

We don’t get up every morning wondering, “Who are the top three companies that are going to try to kill us?” I know of companies that do that in their annual planning processes, and the competitive zeal motivates them. We do pay attention, but it’s not where we get our energy from.

Disruption is a rough business. Do you have any personal regrets about the pain your success has caused traditional retailers?

I’m as sentimental as the next person. I have lots of childhood memories of physical books and things like that. But our job at Amazon is to build the best customer experience we can and let customers choose where they shop.

At what point will the goal change from lowering margins and building market share to making a bigger profit?

Percentage margins are not something we seek to optimize. We want to maximize the absolute-dollar free cash flow per share. If we can do that by lowering margins, we will. Free cash flow is something investors can spend. They can’t spend percentage margins.

Amazon has done a great job of self-cannibalizing its revenue streams—going from Amazon Store to Amazon Marketplace, from print to e-books, and so on. In most companies, moves like those would be hard to execute without organizational turmoil. How have you managed the transitions?

When things get complicated, we simplify them by asking, “What’s best for the customer?” We believe that if we do that, things will work out in the long term. We can never prove that. In fact, sometimes we do price-elasticity studies, and the answer is always that we should raise prices. But we don’t, because we believe that by keeping our prices very low, we earn trust with customers, and that this will maximize free cash flow over the long term.

What have you learned about leadership from running what has become a very big company?

If you’re inventing and pioneering, you have to be willing to be misunderstood for long periods of time. One early example is customer reviews. A book publisher told me, “You don’t understand your business. You make money when you sell things. Why do you allow negative reviews?” And I thought, “We don’t make money when we sell things; we make money when we help customers make purchase decisions.”

How do you institutionalize the ability to come up with these good, misunderstood ideas?

First, there are stories we tell ourselves internally about persistence and patience, long-term thinking, staying focused on the customer. Second, we select people who, when they wake up in the morning, are thinking about how to invent on behalf of the customer. If you like a more competitively focused culture, you might find us dull. We find our culture intensely fun. We have an explorer mentality, not a conqueror mentality.

You’ve generated a lot of attention recently. Is all the publicity good for you and for Amazon?

I have to be choosy—I do very little. But I do interviews because I want customers to understand what makes us tick, how we operate, what our principles are. I think customers want to know who they’re doing business with.

And if you don’t talk, how in the world can we misunderstand you?

Oh, believe me, that wouldn’t stop it.

The highest-ranked woman on the list is Meg Whitman, currently the CEO of beleaguered HP, whose performance as the CEO of eBay from 1998 to 2008 earned her the #9 spot. Overall, only 1.9% of all the CEOs we studied were women.