News Analysis: More Data Links Engagement and Stock Market Performance
The biggest news for ESM readers about Alex Edmans’ most recent article, 28 Years of Stock Market Data Shows a Link Between Employee Satisfaction and Long-Term Value, is that it was featured in the Harvard Business Review. Edmans, who is a Professor of Finance at London Business School with a keen interest in the correlation between engagement and stock price performance, was recently interviewed by ESM for Engagement Radio on this very subject.
According to his analysis of companies that have been rated Great Places to Work over the decades, organizations with high employee satisfaction outperform their peers by 2.3% to 3.8% per year in long-run stock returns – 89% to 184% cumulative – even after allowing for other factors that drive returns. “Moreover," he writes, "the results suggest that it’s employee satisfaction that causes good performance, rather than good performance allowing a firm to invest in employee satisfaction.”
Note, this compares with the compounded growth of over 6% per year of the EEA’s Engaged Company Stock Index since it was created in October 2012.
Edmans believes that using long-term stock performance to gauge the linkage between employee satisfaction and performance has the advantage of isolating for all of the different factors that could affect any such connection. Based on Edmans’ research, companies of all sizes should be investing more in employee engagement or focus their current employee investments more directly on satisfaction and engagement.
In the article, Edmans suggests that many chief executives still don't appreciate the financial connection between employee satisfaction and performance because the general focus continues to be on lowering costs as a means of improving efficiency. Using the example of Costco, he argues that companies that actually invest more in employees often get scorned by investment analysts who believe their costs are too high, even though Costco’s stock is generally outperforming Walmart’s these days, and he notes that it can take up to five years from the start of any employee satisfaction effort for the true value to show up in share price performance.
Notes Edmans: “A CEO who is concerned with meeting quarterly earnings targets may choose not to invest in employee morale – and in so choosing, hurt her company’s long-term performance. Both investors and directors can take actions to mitigate this. Investors should look beyond quarterly reports. Indeed, Unilever’s CEO Paul Polman stopped reporting quarterly earnings to allow the company (and its investors) to focus on long-term value. Similarly, boards of directors should give managers equity with long vesting periods…”
Perhaps investing in employees and the related issue of customer satisfaction is a better way to utilize the excess cash that many public companies often use to prop up their share prices through buy-backs. According to a recent article in the New York Times Sunday business section, Stock Buy Backs That Hurt Shareholders, by Gretchen Morgenson, it's questionable how much long-term return companies get from such efforts. Perhaps they would get a better return by investing in talent development that increases productivity by enhancing skills, enabling job-sharing and fostering innovation, or in activities that improve the customer experience with more personal service to foster greater retention and more referrals.
For information on how to implement strategic engagement strategies in your organization, attend Engagement University and Expo, April 25-28, 2016, at the Renaissance Orlando at SeaWorld.
