Thursday, 20 March 2008

Best Companies and business performance

As I move towards the end of this short series of posts on HR metrics, I want to note some of the other recent research and reports which support making a positive conclusion about people management and its link to the bottom line (a fuller review or earlier research is included in my book).

These range from 'pop research' to more thorough analysis.

In the former category, you've got things like the significant positive difference between the Sunday Times / Fortune best companies to work for and the FTSE / S&P indices. These look at employee's satisfaction with different elements of their experience at work, and so do provide evidence of a correlation between people management practices and business results.

I can't find the graph that was included in the Sunday Times best 100 companies supplement this year (the graphic here is from 2007) but the 31 of these companies which are listed in the UK have performed twice as well as their FTSE 100 rivals during the last five years.

I'd find this quite convincing if I hadn't worked for one of these companies recently, and know just how little they really value the human capital provided by their people.
Anyway. Looking at the 2008 graphic, the performance of best companies and FTSE companies don't seem to be that different during this last year.
This supports the findings of a 2008 study conducted by UBS into the share (stock) price performance of the Fortune best companies (confusingly, these are the equivalent of the the UK's FT best workplaces) which are covered by the firm. This study noted that over the medium term, employee satisfaction does seem to drive a higher company share price. But over the last two years, UBS found the best companies performed negatively relatively to the general index.
UBS think that over the last two years, share prices "were driven more by sentiment than by fundamentals".
They explain:
"Employee satisfaction is a long term driver of value. In the short run, the dominant driver of share price volatility is more likely to be increased uncertainty and risk aversion from the credit crunch, and uncertainty surrounding financial markets and economies, as well as increased political risk in some regions. In current market conditions, long term drivers of intangible value may be taking a back seat."
So employee satisfaction / human capital performance are still driving value; they're just not being recognised in companies' share prices at the moment (and therefore , now should be a good time to invest in 'best companies' combining strong human capital performance with sound financials).
Anyone up for forming an investment club?