How Employee Engagement Affects The Bottom Line

Intuitively it makes sense that happier employees will make an organization more productive, and therefore more profitable.  A recent study from researchers at the University of East Anglia highlights just how big an impact it has.

The researchers trawled through organizational reviews left on the Glassdoor website to gage a sense of happiness in various workplaces.  Perhaps unsurprisingly, those workplaces that were rated more highly tended to achieve better financial performance compared to their lower rated peers.  Whilst this seems intuitive, the authors nonetheless believe that identifying this openly available marker can provide early insights into the financial prospects of a firm.

Disconnect

At the moment however, this connection is not reflected in the share prices of companies.  The researchers conducted an analysis using the trading strategy of a firm that only invests in companies with high levels of employee satisfaction.  The strategy typically produces much higher returns than normal.

“Increasingly researchers from a wide range of disciplines argue that in the current knowledge-based economy, employees are a particularly valuable organisational asset as they can contribute to firm value through innovation and customer relationships,” the authors say.

“Therefore, ensuring their wellbeing and general satisfaction should be a major concern for businesses. This human-centred view of the firm is in direct contrast to the traditional view, according to which employees perform unskilled tasks and, therefore, are expendable commodities. Naturally, which of the two views is the appropriate one is an issue of the utmost importance for both managers and investors.”

With more than 300,000 employee ratings given at over 300 publicly listed companies, the researchers believe their findings are robust, with each firm analyzed having at least 500 reviews over a several year period.  Quarterly financial results were collected for each company during the same timeframe (2009-2016).

“Our results provide empirical support for a human-centred view of the firm. Interestingly, however, it seems that this is not wholly recognised by equity investors, providing further evidence that intangibles are not fully priced in the stock market and, most importantly, that this is not due to lack of information, since we measure employee satisfaction on the basis of freely available online reviews,” the authors conclude.

They believe that the importance of human factors in the workplace is not yet appreciated by the markets, hence why strategies that take this into account tend to out perform the market.

They believe that their work also improves upon previous attempts to do this, because by relying on online reviews, they get a much richer and more real-time insight than that provided by the various ‘Best Companies To Work For’ lists that are produced each year.

Not only is that process annual rather than real-time, inclusion in the list requires each company to pay a fee to the Great Place to Work Institute.  As such, it’s probably not a realistic insight into the workplaces of the world.

Will it form a more integral part of investing strategies?  Time will tell, but it’s certainly an interesting finding, if not particularly surprising.

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