The Link Between Well-Being & Profit

Author: Steve Bloom

In my article Leadership Lessons I Missed, I discuss the importance of managing the soft side of business. Lest people think I’m getting too soft, be assured that I’m a blue-blooded capitalist and committed to helping companies run profitably.

On this matter of making money, my principle divergence from many Wall Street analysts is this: I like making money quarter after quarter, year after year, decade after decade. Short-term gains don’t do much for me. I’ve never been a day-trader or a gambler, and I find unsustainable short-term gain wholly unsatisfying. So if you like making money over the long-haul, read on. Otherwise, good luck at the bingo table tonight; have a smoke while you’re at it.

Millennial Maxim:  Many productive employees is better than just a few
As stated in several articles (e.g., Most Jobs End in Divorce, The Three Truths of Corporate Culture), vibrant corporate cultures, engaged and authentic employees, and moral leadership are prerequisites for long-term success. Much of the proof of this position lies in our research and numerous other projects that illustrate the value of having engaged, flourishing employees operating at sustained levels of high performance. This research typically focuses on individual employee productivity, and relies upon the simple maxim that having most or all employees operating at high levels of productivity will yield beneficial results for the organization — financial and otherwise.

And it Gets Better
There is also research that points directly to the link between bottom-line success and these concepts of employee engagement and well-being. Gallup has been a leader in this research, and for example, conducted a study in 2012 that showed work units with high engagement had 22% higher profitability. These units also scored better in a host of other measures such as 21% higher productivity, 41% lower defects and 37% lower absenteeism. Perhaps most importantly, this study found that firms with engaged employees experienced 147% higher EPS compared to their competition.

How to Get Higher Stock Returns
Another excellent study was done in 2012 by Alex Edmans, Assistant Professor of Finance at The Wharton School of the University of Pennsylvania. Rather than studying employee productivity, Professor Edmans studied firm-level value. “To address reverse causality, I measure firm value by using future stock returns, control for risk, firm characteristics, industry performance and outliers. Companies listed in the 100 Best Companies to Work for in America generated 2.3% to 3.8% higher stock returns per year than their peers from 1984 through 2011,” according to Edmans. This is a powerful study because it focuses on stock returns over a quarter of a century — an extended timeframe that also encompassed several turbulent economic periods. Edman continues his analysis by analyzing a critical dimension of Corporate Social Responsibility (CSR) — employee welfare. He focuses on this one dimension because past attempts at linking CSR to firm value have yielded variable results. Edman speculates this may be because some dimensions of CSR are beneficial to shareholders, while others may not be. “A firm’s concern for other stakeholders, such as employees, may ultimately benefit shareholders (sic), yet not be priced by the market because ‘stakeholder capital’ — the additional firm value created by enhancing stakeholder goodwill — is intangible,” says Edman. Professor Edman then makes a critical point, “It may be that the stock market uses traditional valuation methodologies devised for the 20th-century firm and based on physical assets, which cannot accommodate intangibles easily.”

Wall Street Needs New Measures of Value
I couldn’t agree more, and I suggest that what is needed for the 21st century are new valuation methods that encompass not only traditional financial measures, but also intangibles such as employee welfare. In his conclusion, Edman makes one final note, “I also find that Best Companies systematically beat analysts’ earnings estimates” — further proving the need for Wall Street to enhance its measurement system — that is, unless analysts like being wrong.

Engagement is Good for Innovation Too
Aleksandra Kacperczyk, Professor of Entrepreneurship at Massachusetts Institute of Technology, did a fascinating study on how concern for non-financial stakeholders (e.g., employees and local communities) increased innovation. Professor Kacperczyk studied publicly traded firms in the 34 states that have constituency statutes granting company directors the legal right to consider the interests of non-financial stakeholders.
“We found that the existence of constituency statutes did indeed lead to a significant increase in the number of patents. There was also a marked increase in the number of citations per patent in companies in states that adopted constituency statutes. Citations are an important indicator of both the quality and originality of a patent. They are a sign that what was happening inside these companies was more radical, non-incremental innovation,” states Professor Kacperczyk. She adds, “Our analysis of this data found that constituency statutes did have a significant positive effect on companies’ orientation toward the interests of employees, the natural environment, customers and society at large. These companies were more likely to allocate resources for community purposes or the environment, or to create better working conditions for employees.”
Perhaps most importantly, Professor Kacperczyk found improved long-term bottom-line performance of companies in states with constituency statues. “When directors are allowed to consider the interests of stakeholders other than shareholders, their companies become more innovative and eventually more profitable,” states Kacperczyk.

So Do it For Selfish Reasons
Concern for the welfare of employees is good business, and there’s no reason to be shy about it. Engaged, thriving employees can lead to better financial returns, increased shareholder returns, and more and better innovation. There are also important positive outcomes for additional stakeholders such as the local community and the environment. It is time for Wall Street, board directors and corporate leaders to adopt measurement systems to rigorously track the well-being of employees. Directors and managers should then be held accountable for these measures in the same way they are held responsible for the financial success of the firm. Doing so is simply good business.