Thursday, September 5, 2013

How Would You Define "A Great Company"?

Last week I was interviewed by a journalist from Korea’s Maeil Business Newspaper (the local equivalent of the Financial Times). After quite a lengthy interview, he ended with the question “How would you define a ‘great company’?”

At the time I thought it was a bit of a lame question, but that my answer to him was at least as lame: I babbled something that I would 1) judge a company by its performance – a long-term record of above-average profits – and 2) that employees should really be enjoying being part of that organisation.
As said, at the time I thought it wasn’t my sharpest answer of the day, but when I thought about it for a while, afterwards, I started to really like the question; and even appreciate my answer to it! This might be my memory playing dirty tricks on me – in a feeble attempt to protect my self-image – but, admittedly, if asked today, I would likely give more or less the same answer to that superb question.

I think most would agree that you cannot say some firm is a great company when it is habitually underperforming but, to me, great financial performance is not enough. At the end of the day, an organisation is nothing else than a collection of individuals working (more or less) together. If the people who constitute the organisation do not enjoy being part of it, I have a hard time seeing it as a great company.

I realise some of you might prefer to bring customer satisfaction into the mix, if not other stakeholders. Yet, to me, employee satisfaction is the pivotal point of departure. The legendary founder of Southwest Airlines – Herb Kelleher – used to proclaim that employees (“not customers or shareholders”) were most dear to him. That’s because he figured, if you have happy employees, they will make your customers happy. And happy customers will come back, which will eventually make your shareholders happy too (and, not coincidentally, Southwest had a generous profit-sharing scheme, basically turning employees into shareholders). Southwest has been outperforming its peers for decades.

Yet, most of us – including the stock market – still underestimate the power of employee satisfaction. Professor Alex Edmans – my new colleague at the London Business School – recently published a study that examined the effect on future stock returns of a company making it onto Fortune’s list of “100 Best Companies ToWork For in America”.* He found that such a company subsequently generated 3.5 percent higher stock returns per year than their peers. This finding suggests two things: 1) this employee satisfaction thing really works; having happy employees eventually culminates into hard stock returns, but also 2) that the stock market still undervalues its importance. The stock market habitually does not anticipate these extra earnings, owing to employee satisfaction (even though the list of 100 Best Companies To Work For is public knowledge). 

To conclude: there is money to be made from employee satisfaction. Let’s all get rich and happy – be it not necessarily in that order.

* Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices. Edmans, Alex. Journal of Financial Economics 101(3), 621-640, September 2011
* The Link Between Job Satisfaction and Firm Value, With Implications for Corporate Social Responsibility. Edmans, Alex. Academy of Management Perspectives 26(4), 1-19, November 2012