04 Mar. 2013 | Comments (0)

Watch the on-demand recording of Alison Maitland's Book Discussion web cast from January 2012, featuring her book, Future Work: How Businesses Can Adapt and Thrive In The New World Of Work.

 

If you want to drive up the value of your company, banning work flexibility may not be the best policy. Many commentators have criticised Yahoo CEO Marissa Mayer’s move to pull all remote workers back into the office, and view this move as likely to backfire and damage morale. Others have supported it, arguing that she is right to believe collaboration must be done face-to-face, and that Yahoo needs to be tough to regain its edge.

Either way, it would be wrong for Yahoo, or any other company, to ignore how employees feel about such a move. An instructive study from Wharton business school, recently published in the peer-reviewed Academy of Management Perspectives, has found what it claims is the strongest evidence to date that employee satisfaction boosts the value of a company.

The study demonstrated that companies where employee satisfaction is high – measured by their inclusion in the “100 Best Companies to Work For in America” listing – generate substantially higher annual stock returns over the long term than their peers.

“Proving that contented employees directly improve the bottom line has been hard. Investors still prefer to rely on traditional financial data when assessing a company’s value, so there is little market pressure on management to make a priority of keeping employees satisfied,” says Alex Edmans, assistant professor of finance at Wharton. His findings should help to change that.

What is directly relevant to the Yahoo story is that inclusion in the prestigious “Best Companies” list is based on employee and manager ratings of trust, fairness, diversity, communication, respect, work-life balance and other such issues.

Edmans points out that most studies have investigated the correlation between job satisfaction and the performance of the individual, rather than the overall value of the company. To avoid the possibility that the higher returns he found were caused by the publicity surrounding a company’s inclusion in the list rather than by actual employee job satisfaction, he calculated the stock market returns from the month after the announcement of the list.

He found that firms included in the “best companies” listing generated between 2.3% and 3.8% higher stock returns per year than their peers between 1984 and 2011. This finding is significant enough, but, what’s more, these companies systematically beat earnings estimates from stock market analysts. This outcome, he says, suggests that employee satisfaction is “a valuable characteristic that is not fully valued by the market.”

Why might markets not have fully understood this value? It comes down to their short-term focus, compared with the longer-term nature of the link between a satisfied workforce and higher earnings.

“The market is slow to fully value intangible assets – even when they are independently verified by a highly visible survey [such as the Best Companies list],” writes Edmans. “Instead, an intangible affects the stock price only when it later shows up in tangibles that are valued by the market, such as earnings announcements.”

This evidence that having satisfied employees generates long-term shareholder returns means that it makes business sense for companies to invest seriously in their people, to treat them fairly, to trust them, to respect individual differences, and to handle internal communications well. Such an investment will, however, take time to bear fruit, and the returns to shareholders may only show up over time.

Companies need to support managers in investing in their people, and protect them from the short-term judgment of markets. This can be difficult when there is heavy pressure to refocus a struggling business. Yet, Yahoo and other companies facing similar challenges should understand that it pays in the long term to keep your people happy, whatever that takes.

 

View our complete listing of Strategic HR and Employee Engagement blogs.

  • About the Author: Alison Maitland

    Alison Maitland

    Alison Maitland is a Senior Fellow, Human Capital at The Conference Board. In this role, Alison supports the Human Capital Practice which includes The Conference Board Human Capital Exchange™, r…

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