Across all control variables, the author found that the best companies generated substantially higher returns than peer firms that did not make the list. They showed annual returns that were an average of 3.8 percent higher when the author controlled for risk factors; 2.3 percent higher when the author controlled for ups and downs in their industry; and 2.9 percent higher when the author controlled for a combination of firm size, book-to-market ratio, and strong recent performance.
Nevertheless, Wall Street remains largely oblivious. Examining how these results jibed with analysts’ forecasts of earnings after one, two, and five years, the author found that companies on the list beat the estimates by significantly more than their peer firms did across all three periods.
In addition, the market’s immediate reaction to the earnings announcements themselves was nearly four times as positive for the best companies as for the broader market, another indication that the firms’ upbeat performance caught analysts and investors by surprise. The author argues that just as researchers have relied on traditional models of firm valuation, analysts, too, still judge firms by using metrics that don’t take into account intangibles such as employee satisfaction.
The author also notes that although managers should be encouraged to invest in their employees’ happiness on the job, they should not expect immediate benefits. It may take several years to change the organizational culture, and even longer to see improvements in stock returns. “To encourage managers to invest for the long run, it may be necessary to insulate them from short-term stock price movements,” the author writes, “for example, by giving them stock and options with long vesting periods.”
Finally, the finding that employee satisfaction can boost companies’ future stock returns has implications for corporate social responsibility (CSR). “CSR involves firms considering the interests of stakeholders other than shareholders, such as employees, customers, and the environment,” the author writes. “To my knowledge, this is the first paper that identifies a CSR dimension that improves stock returns, over a long time period and after controlling for risk.”
Companies that have high levels of employee satisfaction generate significantly better stock returns over the long term than similar firms that do not make the same commitment. But Wall Street is still slow to catch on to a correlation, and firms with exemplary workplace cultures consistently beat analysts’ earnings predictions.