Does Company Culture Increase Shareholder Value?
There are many factors to assess when looking to invest in a company, but I believe company culture could be one of the biggest value drivers and should be closely analyzed, especially for a long-term investor. Great company culture is necessary for the longevity of a companyβs success. Culture is not just a short term catalyst but a long term competitive advantage.Great company culture means the employees are feeling secure and happy with the environment they work in everyday, which fosters greater productivity and innovation. Those effects would contribute to greater shareholder value/economic value. I set out to determine if the impact is indeed measurable in terms ofΒ shareholder value (stock appreciation).
The Data
In order to measure company culture, I scraped βTop Largeβ companies in Glassdoorβs βBest Places to Workβ from years 2009-2019. To measure stock performance, I only looked at public companies that were elected to βBest Places to Workβ and scraped www.buyupside.com/stockreturncalculator/stockreturncalcinput.php for their annualized stock returns.
The Analysis
Every year, during the month of December, Glassdoor releases a list of companies categorized by size and location that are deemed to have the best company culture based on that yearβs employee feedback. The companies that end up on this list generally have a great CEO, great benefits, and a difficult but positive interview experience, which amounts to a median culture score of 4 out of 5.Β A great CEO is measured by how many would recommend the CEO to a friend and how many approve of the CEO. Glassdoorβs βBest Places to Workβ companies have a high median rating, which means 91% of ratings approve of their CEO and 80% would recommend their CEO to a friend. Furthermore, these companies have great benefits with a median score of 4.2, which include benefits like 401K matching, health insurance, vacation & paid time off, maternity/paternity leave, free food, etc. Lastly, these companies have difficult interviews, thought candidates leave with positive experiences. Companies with a thoughtful vetting process can build stronger teams for the goals they want to achieve and also retain the team with a great CEO and benefits. Companies that have won every year since 2009 are Google, Apple, and Bain & Company. Google and Apple are now among the largest companies by market cap in the United States. The industries that repeated win βBest Places to Workβ are in technology and consulting, two highly competitive human capital industries that need and must retain top talent to succeed.
So what are employeeβs saying about these companies? I scraped reviews both pros and cons from each company to take a look. Positive reviews contained themes around great benefits, smart people, flexible schedule, amazing work-life balance, competitive pay, etc.
Negative reviews contained themes around lack of benefits, middle and upper management, low pay, long hours, growing pains, etc.
A recurring theme in both positive and negative reviewsΒ is βwork-life-balance.β Employees really care about βwork-life-balanceβ and so should companies.
Companies that make it to Glassdoorβs βBest Places to Workβ work on improving their culture by sending out employee surveys and assessing employee feedback proactively. These companies have large human resource teams that assist with the process. Only the best of company cultures are selected to make it to this list. My analysis shows that the investable public companies in the βBest Places to Workβ list on average have better returns over the S&P 500 companies. Glassdoor βBest Places to Workβ public companies in the βTop Largeβ size have an average 1-year return of 19.1% vs. the S&P 500βs average 1-year return of 12.3%. This average is over 10 years between December 2008 and October 2019 (2019 numbers have been annualized). Those returns compounded over 10 years makes a significant impact on your portfolio. A dollar invested in December 2008 in Glassdoorβs βBest Places to Workβ public companies would have turned into $6.1, while a dollar invested in the S&P 500 would have grown to justΒ $3.4.Β
(Note: December 2008 was a timely month and year to invest with the β08 crash and rebound, so returns may be inflated to normalized equity returns but it is clear Glassdoorβs βBest Places to Workβ companies beat the benchmark by a far margin).
I also split the ranks into categories with first place to tenth places as one category and so on (below). The average return was highest for first to tenth place and generally higher for companies of higher ranks.
Instead of holding for just one year, I was also curious what returns would be like under 3-year and 5-year holds of each yearβs cohorts. Even buying and holding a basket of Glassdoorβs βBest Places to Workβ public companies for 3 and 5 years would have still given you a better return over the benchmark.
While company cultures can deteriorate, great cultures tend to hold over time. Like the city of Rome, culture isnβt built in a day. Itβs built over time, throughΒ a constant iterative process between companies and employees. The lesson for shareholders here is invest in companies with good culture. The lesson for companies is invest in culture, invest in people. The lesson for those looking for a company to work for is to look for great culture, benefits and βwork-life-balanceβ.
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Future work:
Glassdoor βBest Places to Workβ vs. Fortune β100 Best Companies to Work Forβ
Scrape Glassdoor companies to create a list of worst companies to work for based on culture score and look at stock performance.