Does ESG make financial, or even moral, sense? The portmanteau term covers environmental, social and governance behaviour. Critics point to measurement problems — particularly with the “S” factor. However, a study published this month suggests that when workers like and respect their employer, its shares perform better.
Employee satisfaction and excess returns go hand in hand, according to authors Hamid Boustanifar and Young Dae Kang. Using market data extending between 1984 and 2020, their work updates an earlier study in 2011 that reviewed Fortune magazine’s annual list of the 100 Best Companies to Work for in America.
Having created an equally-weighted portfolio of companies which succeed with their staff, they found that it earned excess returns — before execution costs — of no less than 2 per cent annually. Even when considering a company’s size, which if fast growing can have a strong positive effect upon an equally-weighted portfolio, the outperformance persisted. Finally, this portfolio of best places to work did not just beat the market in the good times, it did particularly well in periods of crisis.
Some industries earned “best company” status more often than others. Those favoured places to work tended to sit within sectors which depended most on human capital. Finding a predominance of best companies in highly paid areas such as computer software, banking and (financial) trading might not come as a surprise. But the retail and pharmaceuticals sectors were also high up the list.
Many employees are cynical about drives by bosses to win the “best place to work” accreditation used to attract new recruits. However, employee satisfaction can have a critical impact on corporate performance. This is particularly true to in poorly paid services industries such as hospitality. Job satisfaction, by contrast, often appears strikingly low among bankers and lawyers. Here, high pay looks to be a bigger driver of individual performance than esprit de corps and the desire to help customers
Fund manager Jerome Dodson long ago decided to put his money on those companies which treat their employees best. It has worked well. His Parnassus Endeavor Fund is one of the most highly ranked US large-capitalisation growth funds over the last 15 years, over all timeframes, according to Morningstar.
That suggests employee morale and culture definitely matter — not just to those applying for jobs but to investors too.
The Lex team is interested in hearing more from readers. Please tell us whether you think “best place to work” designations matter in the comments section below.