Corporate culture

The social factors included within ESG analysis are wide-reaching, taking into consideration the relationship the corporation strikes with the multiple stakeholders involved in its business: customers, employees, suppliers and local communities.

One area of interest is how employee relations affect corporate value. For every company that we analyse from an ESG perspective we aim to understand employee satisfaction. KPIs reported by the firm such as employee training hours, staff turnover, and outcomes from staff satisfaction surveys can be valuable, as well as third party employer-rating platforms such as Glassdoor.

The theoretical benefits of job satisfaction are reasonably clear. A satisfying workplace can ensure that talented employees stay with the firm, can be used as a valuable tool for recruitment, and can improve worker motivation. Recruitment is an expensive challenge for any company – using up valuable managerial time, ensuring a cultural fit, training new staff on arrival – but is especially challenging currently considering the tight labour markets experienced in many countries. But what evidence is there that these factors affect company value and stock performance?

There is plenty of academic work on the subject. Some focus on the ‘Fortune 100 Best Companies to work for’ list: a study from 2012 found that an equal-weighted portfolio of these 100 companies resulted in 2.9% annual out-performance against a characteristic-adjusted benchmark. FTSE Russell found that an equally-weighted index of the Top 100 companies returned 11.66% annually from 1998 – 2016, nearly 5% more than the equivalent returns for the benchmark US all-cap Russell 3000 Index (6.72%) and US large cap Russell 1000 Index (6.68%).

More recently scholars from the LSE completed an extensive study on the subject and found a strong correlation between employee wellbeing, productivity and firm performance. They analysed 339 independent research studies, including the wellbeing of 1,882,131 employees and the performance of 82,248 business units, originating from 230 independent organisations across 49 industries in the Gallup client database (an analytic and advisory company).

This graph illustrates the correlations between employee wellbeing, employee productivity and firm performance across all industries and regions. Focusing on major indicators: Staff turnover, profitability, employee productivity and customer loyalty. Their result showed that there is a strong positive correlation between employees’ satisfaction with their company, employee productivity and customer loyalty, as well as a strong negative correlation with staff turnover. Therefore, good workforce practices pay off financially in terms of better operational performance.

It’s important to consider causality. Could it just be that a high-performing and growing company simply providers a more satisfying workplace for employees? Wharton professor Adam Elman has provided academic support to the growing theory that this isn’t the case. In two studies, using two different factors, he established positive causality between employee satisfaction and company value; high employee satisfaction does result in increased company value.

There are well-publicised examples of CEOs and executives that have put much greater emphasis on staff satisfaction than others. Voted the number one Best Workplace in Europe for 2019 was Salesforce, an organisation well-publicised for its generous staff benefits, and one which continues to dominate the market for CRM software.

US wholesale retailer Costco has for decades pursued a different strategy to its peers, with higher wages, higher healthcare insurance contributions, as well as lower margins on products sold to customers. When pressurised by analysts to reduce these costs the co-founder and previously long-standing CEO Jim Sinegal explained ‘On Wall Street, they’re in the business of making money between now and next Thursday. I don’t say that with any bitterness but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.’ The long-term share price performance relative to peers suggest this was a strategy that fared very well.

What this evidence tells us is that employee satisfaction is a valuable characteristic that is not often fully valued by the market. This creates an interesting opportunity for investors with a long-term view, to incorporate an evaluation of the intangible asset that is employee satisfaction.

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