Linking Employee Engagement to Stock Price


The Holy Grail of human capital management has always been the direct linkage and correlation between investment in leadership development and increasing stock price.  Each year  The Great Place to Work Institute publishes a list of the “100 Best Companies to Work for.”  The analysis looks at observable investments (like a cafeteria or daycare) as well as employee attitude and engagement.  Research conducted by the Great Place to Work Institute in 1998 and again in 2006 confirmed that companies with higher levels of engaged employees correlate with higher stock returns.  In a recent article in Smart Money, the writer and stock analyst Jack Hough had the guts to ask the question so many in our field tend to wince at or just ignore;

Do happy workers produce more prosperity, or do prosperous companies make happy workers?

If it’s the former, than consulting companies and firms that specialize in creating engaging workplaces are indeed justified.  If it’s the later, then business in general would be much better if such “soft” issues as leadership and employee engagement were ignored and instead just focused on the business.  If the business thrives than the people issues will take care of themselves.

Fortunately, Jack Hough is a savvy analyst and dug a little deeper.  He cites research from Alex Edmans, a former investment banker form Morgan Stanley, who looks at how the market values intangible assets like employee satisfaction, brand and customer satisfaction.

Edmans simulated buying shares of each year’s publicly traded Best Companies [From the Best Companies to Work List].  Yearly returns totaled 14 percent versus 6% for the broad market.  Results were strong even after controlling for other factors that influence returns, like company size and valuation metrics…The results support Edmans’s hunch that investors tend to ignore valuable company assets that don’t lend themselves neatly to financial analysis.

Jack puts this valuable information to work by recommending the stocks of six companies from the 2008 list of Best Companies.  I think Jack is on to something here.  If the market undervalues intangibles, than a strategic investment that leads to increasing employee engagement and leadership development for a publicly traded company should be a leading indicator of future higher stock returns that outpace the market average.

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