If any company is in doubt as to the ultimate benefit in empowering and engaging with its workforce, they should take a look at a study which clearly demonstrates the link between employee satisfaction and outperforming stock prices. There is one caveat – the link is only evident in countries with flexible labour markets.
Last year, Alex Edmans, a finance professor at London Business School and Wharton, sought to examine the link between employee satisfaction and stock market performance in his study, Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World.
Prof Edmans had previously shown that companies with high employee satisfaction, as measured by inclusion in the list of the “100 Best Companies to Work For in America”, which is compiled by Great Places to Work, saw their stock price outperform their peers by the order of 2-3 per cent a year over 26 years.
“Satisfaction is positively correlated with firm value,” he found. But would this hold true outside the US? To find out, Edmans examined the relationship between employee satisfaction and abnormal stock returns in 14 countries, using Great Places to Work data. In his study, he considered as a starting point the importance of human capital in modern organisations. Most modern firms’ key assets are their workers – not only senior management, but also rank-and-file employees,” he wrote.
But do employee-friendly policiesactually translate into forming a source of “sustainable competitive advantage”? Edmans found the results striking, saying that this competitive advantage turns into higher stock prices. He also found employee satisfaction is associated with positive abnormal returns in countries with high labour market flexibility, such as the US and UK.
Flexible workforce
Conversely, the study found these benefits were lower in countries with inflexible labour markets, leading to a downward shift in the marginal benefit of expenditure on employee welfare.
While Ireland is not directly referred to in the study, it’s a hypothesis that should also hold up here, given that Ireland’s flexible workforce is frequently cited as a key factor in US multinationals’ decision to set up shop here.
The lesson for companies then is clear. Investing in a company’s talent is not just about a marketing spin that no one really believes – employee welfare is positively related to firm value. And not just that, but human resources departments are not just cost centres, they’re “a positive source of value creation”.
This also means that investors could adopt a strategy of investing in firms with high employee satisfaction as it should generate superior returns. Another interesting outcome shows, however, that the market does not fully value intangibles such as stakeholder capital. If it did, then stock prices should rise as soon as the GPTW list is published – not in the months that follow, as the study demonstrates.
But is this always true?
The study shows less relevance in regulated labour markets where hiring and firing are harder, and thus the recruitment, retention, and motivational benefits are lower.
The lesson for companies then in countries such as France and Germany is that even if other studies have shown a clear link between outperformance of a corporate when it invests in its staff, this link is not as strong in these countries.
