According to a paper published on October 1, a portfolio that includes companies with high employee-satisfaction ratings can measurably outperform a portfolio that doesn't feature such firms. And these returns were even better in crisis periods.  

Researchers Hamid Boustanifar and Young Dae Kang at EDHEC Business School in Nice, France, said the paper, entitled Employee Satisfaction and Long-run Stock Returns, 1984-2020, builds on a similar 2011 study by expanding the dataset and controlling for more variables.  

Using data from the Great Place to Work Institute, the two men created a portfolio that contained some of the highest-rated companies from those lists over the years. The data was based on an anonymous survey of more than 4.1 million U.S.-based employees that was started in 1984, updated in 1993, and then used by Fortune magazine to compile its annual “100 Best Companies to Work for in America” feature beginning in 1998. Only companies that employed at least 1,000 people in the United States were considered.

The researchers used monthly returns from the companies as their basis of comparison (a method that allowed them to rebalance the list whenever it was updated), and they also controlled for other factors such as size, book-to-market ratio, and momentum, to ensure that their results could be attributed to employee satisfaction rather than other factors. “The [returns were] not driven by firm characteristics, industry composition, or micro-cap stocks,” they said. 

The portfolio that Boustanifar and Kang ultimately created included 283 companies. The two men found that the average monthly return of the best-company portfolio was 1.25 percent, higher than both the average return for a portfolio based on companies with similar characteristics (1.14 percent) and a portfolio based on companies in similar industries (0.95 percent). However, when the researchers controlled for important factors such as the riskiness of the companies involved, the results were even more impressive: The best-company portfolio outperformed at a rate of roughly 0.2% per month, resulting in an annual excess return of approximately 2.5%.

Interestingly, when the researchers looked at the returns achieved during various market periods over the last three decades — the pre-dot-com boom (1984 to 1994), the dot-com boom (1995 to 2000), the dot-com crash (2000 to 2002), the boom leading up to the 2008 financial crisis (2002 to 2008), the financial crisis itself (2008 to 2009), the years following the financial crisis (2009 to 2013), and the period in which interest in ESG was on the rise (2014 to 2020) — they found that the best-company portfolio held up particularly well.

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For example, during the dot-com bubble crash and the financial crisis, the best-company portfolio returned about 0.8 percent per month and 1.5 percent per month, respectively, higher than the return of the average equal-weighted best-company portfolio, which returned between 0.17 and 0.20 percent per month over the 36-year sample period. 

“Overall, our results suggest that the stock market still undervalues employee satisfaction, which seems to have the greatest value in ‘bad’ times,” the researchers said.