December 26, 2007
Screening for Satisfaction
by Anne Moore Odell
The 2007 Moskowitz Prize for Socially Responsible Investing was awarded to a study that shows
higher employee satisfaction has historically correlated to higher stock prices.
Making your shareholders richer might start with making your employees happier. The 2007
Moskowitz Prize for Socially Responsible Investing was awarded last month to a study that draws
a parallel between higher employee satisfaction and higher stock prices.
"Does the Stock Market Fully Value
Intangibles? Employee Satisfaction and Equity Prices" by Alex Edmans of the University of
Pennsylvania's The Wharton School was
awarded the $5,000 prize named after socially responsible investment innovator Milt Moskowitz. The
prize supports SRI research and is presented by Center for Responsible Business at the Haas School of Business, in cooperation
with the Social Investment Forum.
Lloyd Kurtz, Portfolio Manager at Nelson Capital Management and a Lecturer at the Haas School
of Business, University of California at Berkeley is the Moskowitz Prize Program Administrator.
Kurtz told SocialFunds.com: "In my career I have seen perhaps two academic studies that
persuasively make the case that a social investment variable was associated with positive long-term
risk-adjusted returns. The first was Nadja Gunster's study of the Innovest environmental ratings
that won the Prize in 2005. "
The Prize-winning study is chosen each year from a field of
30 or more academic studies, both published and unpublished. An all-volunteer judging group selects
the award winning study.
The sponsors of the Moskowitz Prize are Calvert Group, First
Affirmative Financial Network, Nelson Capital Management, Rockefeller and Co., and Trillium Asset
"Employee satisfaction can improve shareholder returns," Edmans said. "While
it may seem obvious that firms do better if their employees are happier, this actually runs counter
to traditional management theories. Conventional wisdom is that shareholder value is maximized by
minimizing the returns to other stakeholders, e.g. paying their employees as little as possible,
both in terms of cash salary and working conditions. This paper suggests the opposite: it's not a
Edmans' study starts with a portfolio of stocks created from Fortune
magazine's "Best Companies to Work For in America" in 1998. By the end of 2005, this portfolio
earned over twice the market return while also outperforming industry benchmarks. Interestingly,
the award's namesake Moskowitz is the co-author of Fortune's list.
responsible investors, Edmans' research helps show that investing responsibly, at least screening
for employee satisfaction, can improve returns. The study didn't examine other SRI screens.
"Studies often find that SRI screens worsen returns, or at best have no effect on returns,"
explained Edmans. "The conventional view is that you need to accept lower returns to invest
responsibly: it's an either-or decision. This paper suggests that investors may not face a
The role of employees has greatly changed over the past century. One hundred
years ago, consumers demanded low-cost, standardized products. These goods were produced by
instructing employees to perform unskilled, repetitive tasks such as on assembly lines. There was
no need to provide pleasant working conditions to retain workers since they undertook simple tasks,
departures were nonchalantly met by new recruitment. Employee satisfaction had no role in
motivation either. The threat of firing, and pay-for-effort were sufficient to induce effort.
However, employees' roles have changed. "Nowadays, product quality and innovation are
increasingly important - perhaps because greater incomes mean that consumers are willing to pay for
quality. This in turn requires employees to exhibit creativity and initiative, rather than simply
following instructions. Indeed, they are now the main source of value creation in many companies,"
This explains the increasing importance of employee satisfaction. It is a
way of retaining key workers, allowing the firm to build competitive advantage through a superior
workforce. In addition, it is a powerful motivator. Satisfaction leads to workers identifying
with the firm, and thus exerting more effort than required by the employment contract.
Pay-for-output is a less effective tool, since many important outputs (e.g. building customer
relations) are hard to measure.
The second part of Edmans' study looks at how the market
has, in the past, undervalued intangibles, such as investments in human capital. Edmans defines
intangibles as "any asset that is valuable to a firm but cannot be easily valued by outsiders, e.g.
a strong corporate culture, good relationships with suppliers and customers."
uses Fortune magazine's list of "100 Best Companies to Work For" because it is highly visible to
investors in the market and is an independent verification of intangibles. Edmans formed his
portfolio of companies from Fortune's list several weeks after its publication, after the response
to the list would have been visible in stock prices.
Since these portfolios earned
superior returns, the Fortune list was not priced by the stock market. This suggests that
intangibles in general (the vast majority of which are not independently verified) are not
incorporated into prices.
The study goes onto state that managers concerned with the stock
price, may thus invest too little in intangibles. This can have serious consequences on the
long-term growth of the firm.
Parnassus Investments' Workplace Fund
has created a portfolio of companies that offer excellent workplaces with the help of Moskowitz.
Kurtz also reported that Nelson incorporates the "100 Best Companies to Work For" data into their
investment decisions, for both SRI and non-SRI portfolios. Edmans, likewise, has said that he will
invest his prize money in a mutual fund that invests in companies with good workplace practices.