Happy and motivated employees generate better outcomes for companies and investors: do we finally have proof?
Companies often claim people and culture are their ‘best asset’, but now it’s becoming a new investment factor.
Annie Coleman, a Senior Advisor at Audley and an expert in organisational culture, argues that now is the time for investors to wake up to this often-overlooked catalyst for corporate growth.
Peter Druker once said culture eats strategy for breakfast. In other words, your culture will determine the success or otherwise of your business regardless of how effective your strategy may be.
Corporate culture is critical for corporate success and corporate responsibility, yet it is widely seen as impossible to measure objectively. Most research or evidence into the benefits of having engaged, happy and motivated employees supported by a strong culture has been generic and there is still a lack of consensus on what can and should be measured. If culture is so crucial, then it needs to be managed. If it needs to be managed, then it needs to be measured. And there’s the rub.
However, this has not stopped a USA fund management company, Harbor Capital, from launching an Exchange Traded Fund (ETF) that seeks to profit from the undervaluation of an employee-friendly corporate culture. To do this, Harbor Capital collaborated with Dan Ariely, co-founder of Irrational Capital and a leading behavioural economist, and James B. Duke Professor of Psychology and Behavioural Economics at Duke University, to systematically evaluate the culture of the companies in its fund.
“Happy and motivated employees can generate better outcomes for companies and investors,” says Ariely. “Of all the investments companies make, creating a strong culture is one of the best ways to create value. This is why employee behaviour and motivation is such an important predictor of stock market performance.” As we’ve seen with the scandal currently impacting the CBI and in the past Enron, employee behavior can be an organisation’s downfall.
However, the value of a company’s culture line has not always been captured by accounting rules and this is the gap Harbor Capital is aiming to fill. “New investment factors don’t come along very often. Human capital felt like the missing piece of a jigsaw” said Kristof Gleich, Harbor Capital’s chief investment officer.
So how exactly does Harbor Capital evaluate these funds? Well, this is based on workers’ views of their companies, which are scored across seven categories to create a Human Capital rating by Irrational Capital, an investment research boutique. No financial data is used in the ratings and Ariely has claimed that the strongest share price signals were derived from harder-to-measure metrics such as employees’ perceptions of autonomy, fairness, trust, alignment of interests, and psychological safety.
This rating is formed on two types of data sets. One is publicly sourced from employment-related websites, such as Glassdoor, and other public information. The other is from private and proprietary data that is based on employee surveys. The surveys are conducted by a third party that establishes relationships with companies and uses a set of questions to determine employee satisfaction in a variety of areas including such things as workplace fairness and the absence of unneeded bureaucracy.
However, the idea that culture can be measured is still much debated. In the sceptics corner, Dr. Allen Zimbler, Formerly Chief Integration Officer of Investec and psychologist summarises the challenge “Culture might be possible to understand, but is very difficult to measure – how does one measure something as intangible as a pattern of assumptions emerging within a group, and shifting, dynamically, as the group begins to change, within a field that is constantly changing?”
Others argue precise measurement is both achievable and essential, mainly through the use of sophisticated employee surveys. But one of the challenges that come with culture measurement and the utilisation of annual or bi-annual surveys is that people can say what they think you want to hear, and there is a time lag before action can be taken or things change.
For now, The Harbor Corporate Culture ETF (HAPI) continues to attract investor attention. It has a portfolio of about 150 US companies and accumulated $240mn in assets which have delivered a 19 percent total return since it was launched in October 2022. JPMorgan’s quantitative analysts have also identified Irrational Capital’s work as a potential source of alpha — market-beating returns. “The Human Capital Factor exhibits noteworthy long-term outperformance versus the [US equity] market,” wrote Ayub Hanif, an analyst at JPMorgan, in a research note in November.
This ETF is definitely worth watching and if it continues to deliver such positive returns, outperforming most equity indices, it will be indisputable evidence that not only can culture be measured but that those organisations with cultures that are actively managed and monitored do deliver enhanced business performance. This is something CEOs cannot afford to ignore and is likely to become an increasing area of focus for investors.
By Annie Coleman, Senior Advisor, Audley