‘Best companies’ are better performers

The neverending wrangle over whether firms that make their employees happy can bring the same kind of smiles to shareholders has just received an answer from a UW–Madison researcher:

Yes, they most emphatically can.

What, skeptics ask, is the payoff of being named to Fortune’s “100 Best Companies to Work for in America” list, besides the sheer honor of the thing? Why should beady-eyed bottom-line readers care a whit for workplace initiatives?

The payoff, says Barry Gerhart, business professor at UW–Madison, is better financial performance. “The best employers create competitive advantages through people, which pays business dividends over time,” he says.

Gerhart and colleagues Ingrid Fulmer from Vanderbilt University and Kimberly Scott from the consulting firm Hewitt Associates analyzed the average annual and cumulative stock returns from 101 publicly traded “Best Companies.”

The firms included General Mills, 3M, Compaq, Southwest Airlines, Wal-Mart, Lands End, and Johnson & Johnson. Some of them were taken from Fortune’s “Best Companies” list in 1998 and others from a 1993 book by the same authors who conducted the Fortune analysis.

The companies had implemented policies to help them attract, motivate and retain the kind of employees who would help them compete. The initiatives included increased employee training opportunities, greater employee autonomy, stock plans, on-site daycare and telecommuting.

Gerhart’s team compared stock returns of “Best Companies” with two different measures, and the results were striking:

• The 1993 Best Companies outperformed a broad market index by 87 percentage points (237 vs. 150) during 1990-96.
• The 1998 Best Companies beat the index by 56 percent points (219 vs. 163) in 1995-98.
• Both the 1993 and 1998 Best Companies surpassed the returns of 100 similar companies matched by industry and size that did not make the lists. The 1993 List companies exceeded their matched competitors by 121 percentage points (237 vs. 116), and the 1998 Best Companies beat their competitors by 73 percentage points (219 vs. 146).

Gerhart’s group also examined other markers of financial performance for the 100 Best Companies over a seven-year period. Compared to their matched competitors, the Best Companies reported a higher operating performance (operating income to assets ratio), better return on assets, and a higher ratio of research and development and capital expenditures to assets.

“Adopting the employee policies of the Best Companies does not seem to have a downside risk,” Gerhart says. “In fact, the greater risk is that firms who don’t give enough attention to workforce issues may put themselves at a competitive disadvantage, especially in a tight labor market.”