Shares of businesses that rank highly in the ‘best companies to work for’ list have outperformed the market over the past quarter of a century.
What’s more, new research has shown, this “happiness premium” is significant, with the normal outperformance against the benchmark of 2%-2.7% per year rises to an excess return of 16.8% during periods of ‘crisis’.
The academic research report, entitled “Employee Satisfaction and Long-run Stock Returns” was compiled by Dr Hamid Boustanifar, PhD, associate professor of finance at EDHEC Business School and his colleague Dr Young Dae Kang, PhD in finance, at EDHEC and financial economist at the Bank of Korea.
The study shows long-term stock performance based on the '100 best companies to work for' rankings from 1984 run alongside a performance analysis for the portfolio up until 2020, including a rebalancing as around 10-15% of companies are replaced each year.
Unlike ESG scores, the ‘best companies to work for’ list is not determined by companies' written policies, observed Jefferies ESG strategy team, and includes qualitative factors such as respect and fairness, and is announced publicly each year.
The happiness premium of 2%-2.7% “alone is significant and a clear sign that investors must further integrate human capital in financial analysis and investment decision-making,” said the Jefferies strategists.
Biggest excess returns were found during financial crises of around 1.4% per month, though excess return is still positive in most periods and the research did not indicate any trend upward or downward in the size of abnormal returns over time.
While the '100 best companies to work for' list is limited to 100 and made public each year, “there are hundreds of companies that high employee satisfaction, and investors need to do the work to isolate these companies”, said the Jefferies team.
“There is intuitively even more alpha to find given that there are companies with high employee satisfaction that aren't made public.
“Particularly with a recession on the horizon, we encourage investors to search for these companies.”
Most of the best companies are large or mega-cap names, with the median market cap around US$20bn, with the list being topped in 2020 by Hilton (NYSE:HLT), UKG, Wegmans, Cisco Systems (NASDAQ:CSCO), Workday (NASDAQ:WDAY), Salesforce (NYSE:CRM), Edwards Jones and Stryker (NYSE:SYK).
Most of the larger names in the UK best companies to work for list are privately owned, led by retailer Hobbycraft, which is owned by Bridgepoint Group PLC (LSE:BPT), though the top 20 included Howden Joinery Group (LSE:HWDN), TheWorks.co.uk PLC (LSE:WRKS), Card Factory (LSE:CARD), Mears Group PLC (AIM:MER), NCC Group PLC (LSE:NCC) and DFS Furniture PLC (LSE:DFS).
An alternative list from Glassdoor included Abcam (AIM:ABC), ARM Holdings plc (LSE:ARM), Wise PLC (LSE:WISE), Ocado Group PLC (LSE:OCDO), Diageo PLC (LSE:DGE), The Gym Group PLC (LSE:GYM) and Barratt Developments PLC (LSE:BDEV).