Worker satisfaction boosts future returns on companies’ stocks, but Wall Street has been slow to catch on, new research finds

See on Scoop.itpersonnel psychology

Ioannis Nikolaou‘s insight:

When former General Electric CEO Jack Welch told the Financial Times four years ago that "on the face of it shareholder value is the dumbest idea in the world," and cited workers as among a company’s main constituencies, the irony was obvious. Here was the man whose ruthless approach to employee relations had earned him the nickname Neutron Jack (after a nuclear weapon designed to kill people without destroying property) but who now seemed to be suggesting that employees were worthier of top management’s concern than company investors were.


How important is worker satisfaction to corporate financial performance? Notwithstanding Mr. Welch’s apparent change of heart, demonstrating such an effect has proved elusive. "There is still much debate on whether these variables are actually related in practice," begins a paper in the current issue of the scholarly journal Academy of Management Perspectives.


The study then proceeds to provide what its author, Wharton professor Alex Edmans, claims to be the strongest demonstration to date not only that the two are related but that worker satisfaction is a significant driver of firm value rather than just a happy byproduct of it. Focusing on the yearly listing in Fortune magazine of the 100 Best Companies to Work For In America, the University of Pennsylvania professor finds that those firms generate considerably higher annual stock returns over the long term than the broad market does — as much as nearly four percentage points higher per year.

Equally important, Wall Street seems largely impervious to this impressive impact. Noting the intangible nature of employee satisfaction, the study asserts that "the stock market uses traditional valuation methodologies, devised for the 20th century firm and based on physical assets, which cannot accommodate intangibles easily."


Moreover, the market is proving a slow learner: stock analysts’ under-appreciation of the effect has been even more pronounced since 1998 than it was before, even though the visibility of the Best Companies list greatly increased with its first appearance in Fortune that year.

See on aom.org



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