Workplaces: The human element

Can being named a great workplace boost a company's stock?

Having digested the feel-good news in our Great Workplaces package, let's get to the questions that really matter: Do progressive human resources programs feed into the stock price of a company? And if they do, should investors buy the companies on our list of great places to work (at least the ones that are publicly traded)?

Amy Lyman, a director at the San Francisco–based Great Place to Work Institute (the U.S. arm of the organization that put together the numbers), reassuringly suggests there is indeed a link between progressive HR and outsized stock performance. As proof, she points to work done by Russell Investment Corp., based in Tacoma, Wash., which found the group of 100 best workplaces in the United States (published by Fortune) has, over the long term, beaten the Russell 3000 and the S&P 500. “It confirms what we've always heard from companies,” says Lyman. “It might not happen every year, but over the long term these companies consistently outperform the index.”

According to Russell, a portfolio of the 100 best U.S. workplaces measured from 1998 to 2005 saw a total gain of 10.12%, which beat comparative gains of 4.81% on the S&P 500 and 5.22% on the Russell 3000. The return is even better for what Russell calls the Reset Annually portfolio, a model portfolio in which the stock in each company is cashed out at the end of the year and then reinvested in the stocks of 100 best workplaces that make the list the following year. By rebalancing the portfolio annually, each new iteration of the list is picked up in the numbers, and that boosted performance even more—total return came in at 14.75%. “Treat people right, and they'll treat the company right,” concludes Lyman.

So it's clear then: progressive HR and long-term stock performance are linked.

Well, not so fast. Peter Cappelli, a professor of management at Wharton School of Business in Philadelphia, has his doubts. He's not convinced that the kinds of things that put companies on top workplaces lists translate into a bump in stock price. “It's a tough hurdle to set for an HR practice,” he says. “Share price is influenced by so many other things that I'm skeptical. Companies that perform better than the market may be doing all kinds of things right. They may not just be doing teamwork exercises.”

Could the companies most likely to put these programs in place just happen to be in hot sectors? Cappelli's research suggests the money spent on HR programs cancels out any net benefit—in other words, progressive HR is a cost of doing business in competitive sectors where employees are in high demand. That suggests the better stock performance is a result of the sector the company is in, not the fact you can bring your dog to work. “There isn't pervasive evidence that these two things are correlated. Stock price is embedded in a series of other programs,” says Cappelli. “Of course, this doesn't mean you don't put these programs in place. It's just hard to say they are moving the stock price.”

So what can we say about companies on the Canadian best workplaces list? The class of publicly traded outfits among them is too small for valid statistical analysis. But we looked at the three companies that have floated shares in Canada to see if we can find answers about the link between work environment and share performance. What we found does not provide a definitive answer, but shows that stocks are affected by different factors at different times. That might not be reassuring to investors looking for rules to follow, but in markets cause and effect are rarely obvious.

The biggest name on our list is TD Bank Financial Group (TSX: TD), a major financial services stock that is followed by a large group of analysts. Those who watch the firm for a living fold macroeconomic conditions, sector performance and news about the bank into carefully constructed stock models to arrive at a valuation. At some level, progressive HR practices are baked into that analysis, sure, but it would be hard to separate them from the overall noise. Far more important in an analysis on a massive company like TD would be, say, the forecast on conditions in the banking sector and an outlook on interest rates. The stock is also likely to move in a similar pattern to its peers, as the sector is very well-developed and mature (and it's often moved by big institutions buying and selling large blocks of bank sector index funds). That is, the fact the company is on our best workplaces list is likely far down the list of factors affecting the stock movements of TD.

And it may not be the strongest buy right now, even though it's a great workplace. Bank stocks have been in bull mode for a couple years now, and some analysts are suggesting the sector as a whole may be through that growth phase. To suggest an investment in TD today because it's a good workplace might not make much sense, especially as analysts seem split on the company (a very slim majority of analysts call it a Buy rather than a Hold).

Different story at Sandvine (TSX: SVC), a startup that has been publicly traded only since October. The company helps telecom companies manage capacity and security on high-speed residential Internet connections. Analysts like the company because the number of residential users of high speed is growing and online gaming and gambling are becoming more popular. The talk on this stock is focused on its unique niche. Unlike TD, Sandvine's price won't be moved by sales of index funds, but rather by investors watching whether the company can make money in a highly competitive and newly emerging industry. The company's shares realized a big pop when Sandvine announced higher-than-expected earnings in the latest quarter—an indication it's being watched as an individual stock. It's now trading at about $4.50, up from around $2 earlier this year, and five out of six analysts rate it a Buy.

Also on our list is Softchoice Corp. (TSX: SO), a company started in 1989 that helps companies buy and install computer gear. As a stock, we might say it's among the most directly affected by its work environment. Softchoice has rung up a string of successes of late (it recently announced its fourth-quarter earnings up 71% from the previous year) and continues to grab market share, which it attributes to its “high-touch” call centres. At a time when many companies are moving call-centre services onto the web or offshore because of the expense, Softchoice is going in the opposite direction—keeping its call centres in North America and promising that all calls will be answered by a human being within two rings—and that's been key to its success. Motivated employees in the call centres feed more directly into success than it might at other companies. The company's stock is up from just under $10.50 in November to $14.36 at press time.

So does a link exist between work environment and stock price? Like all things that have to do with ever-changing markets, it's hard to say. Sometimes it matters, other times not as much. But that's the nature of markets: identifying hard and fast rules is dicey, as the fundamentals themselves change over time. In the end, the only surefire way to take advantage of the workplaces on our list may be to get a job at one of them.