Sent: 26-10-2010 11:36:05
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Are Good Employee Relations Worthwhile?
Companies with more socially responsible attitudes to their employees may see better financial returns and stronger stock market performance.
Published research has tended to show that firms enjoying better reputations perform better financially and that they are likely to be rewarded for their efforts by investors. However, the research is not as clear-cut as it may seem initially.
Rather than socially responsible behaviour coming first, firms may elect to enhance their reputations by becoming more socially responsible after they become financially secure and feel that they are able to commit additional resources to socially responsible business programmes.
Social responsibility, investment returns and financial outcomes are, therefore, linked but the direction of the linkages remains somewhat clouded.
The results of some previous studies may have also been biased where they have sourced their information about the level of social responsibility from management, investors, analysts or other third parties observing outcomes from outside the company.
The business practices of companies with strong financial outcomes are likely to be looked on more sympathetically by investors, for example, than the practices of poorly performing companies. The level of social responsibility among the latter companies will tend to be scrutinised more closely and faulted by observers placing high importance on good financial outcomes.
A subset of social responsibility is how companies treat their employees. In an article entitled "Can firms do well while doing good?" (Applied Financial Economics, June 2010), authors Parvez Ahmeda; Sudhir Nandab and Oliver Schnusenberga (AN&S) look at the connection between company reputation among employees and investment outcomes. They report the results of a study examining the stock market reaction to the annual announcement by Fortune magazine of The 100 Best Companies to Work For.
Two thirds of the Fortune magazine ranking is based on an independent survey of companies and interviews with randomly selected employees. One third of the ranking is based on the magazine's analysis of a range of factors that might be relevant to the standing of the company as an employer.
The approach of this study is unusual insofar as it is based on information obtained from a stakeholder group directly affected by the actions of companies.
There are several reasons why companies ranked highly by employees should also be financially stronger than average and show better investment returns.
- More contented employees are more likely to work harder and, at the margin, in the best interests of the company.
- A high ranking should reassure investors about the skill of management and the sustainability of the business practices being employed.
- Companies with good reputations should attract more highly skilled workers.
- Some employees may be prepared to give up some benefits to work at a highly rated firm.
- If employees are confident abut the progress of the firm, they may be more prepared to delay compensation or modify their claims when the company might need some leeway in adjusting costs.
The AN&S study attempted to deal with four related issues:
- the stock market response to being chosen by the magazine;
- the connection between recent financial information and the stock market reaction;
- financial performance after the announcement of the survey results; and,
- whether the precise positioning on the list has an effect on these outcomes.
The researches used US data for the period between 1998 and 2003. In 2003, there were 269 companies available for survey with 40,713 employees randomly chosen for interview. The median number of employees in the companies covered by the survey was 10,497. Median sales revenue amongst these companies was US$2.68 billion.
The researchers concluded that their results did provide evidence to support the hypothesis of strong positive valuation effects for firms in the Fortune magazine rankings. As expected, reputation does appear to have a positive impact on stock prices.
There was a significant relationship between rank and pre-survey financial performance measures. The return in the two years prior to the ranking is highly positively correlated with subsequent rank as a best employer.
There was no significant relationship found between firm rank and cumulative abnormal returns. It seems that the exact rank is less important to markets than just being included on the list.
There is some evidence that a good reputation as an employer attracts more workers and reduces employee turnover. The excess returns for the sample period are positively related to the job growth rate for the overall sample. However, this was not the case for sub samples of firms also suggesting that the initial entry onto the listing was important ant and that subsequent movements diminished in importance as a guidepost to employment attractiveness.
Subsequent to inclusion in Fortune's 100 Best Companies to Work For, sample firms with a more favourable ranking experience higher sales and profit margins than their lower-ranked counterparts.
This research offers some evidence that socially responsible attitudes toward employees comes with superior financial performance. However, the time period and sources of data probably need to be extended before firm judgements can be made about the effects.
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