Recent findings by JP Morgan on Environmental, Social and Governance (ESG) investment strategies provide irrefutable evidence that an engaging culture creates economic value and superior returns. Essentially, by using Irrational Capital’s Human Capital Factor (HCF) metric for stock picking, the study proved that investing in companies with strong leadership and engaged cultures, who also prioritise innovation, will on average yield a 3% higher return than using other more traditional metrics.
Human Capital is defined as “an intangible asset that is critical for a company’s survival, yet is frequently overlooked. It encompasses the habits, knowledge, talent, motivation and experiences of an organisation.” The HCF metric can be understood as a behavioural score that quantifies corporate culture by measuring behaviours and motives, rather than the more easily quantifiable stats (e.g. compensation packages, employee diversity, retention rates or the number of diverse members on the board).
The data set is significant (comprising almost 5 million responses, 78 million data points and including 2000 US companies from 2014 – 2019). HCF measures leadership and engagement across nine categories: Direct Management, Emotional Connection, Engagement, Innovation, Leadership, Organisational Alignment, Organisational Effectiveness and the Basics (compensation, benefits, training, etc.).
The results are evident. There was a strong correlation between HCF and GDP growth in the US from 2009 to 2019. Behavioural elements such as Purpose, Autonomy, Psychological Safety, Diversity of Thinking, Appreciation for the Individual, and Transparency were highlighted as behaviours that empower employees to make decisions and take initiative; verifying that a healthy culture generates healthy (and long-lasting) results.
Interestingly, there was an anomalous dip in 2020 (HCF went up but GDP went down) due to the COVID pandemic, proving how companies and their leaders had to focus even more on employee engagement to survive those very challenging times.
This is concrete proof of a direct link between company culture and equity returns.
The two highest-ranking HCF sectors are Information Technology and Communication Services – notable since these sectors depend even more on their human capital than other resources to generate their revenues. Conversely, more physical resource-intensive sectors such as Industrials, Materials and Energy, score relatively poorly in aggregate.
This takes us to our next point that elaborates on exactly why a purposeful culture is so important for optimally engaging your customers.
The Benefits for Customer Satisfaction
When 68% of consumers claim to be willing to pay more for good customer service (HubSpot), and the primary reason for customers switching products/services is due to feeling unappreciated (New Voice Media), it is made clear that how employees treat your customers impacts your bottom line.
The echo chamber that is social media makes it effortless for dissatisfied customers to complain to other potential and existing customers (36% share their experience on social media). In addition, 70% of customers feel that technology makes it easier to take their business elsewhere if needed (Salesforce). Investing in new customers is five times more costly than retaining your existing ones, who are 50% more likely to try new products and spend 31% more if they remain loyal to you (Invesp).
An infamous example of how a disabling culture had fatal consequences for customers – as well as the organisation – is the Boeing case study, recently screened as a Netflix documentary. Boeing, a company once revered for safety, is now viewed with mistrust and scepticism following two fatal crashes that took the lives of 346 customers, costing the company 20 billion dollars. An engaged, safety-first culture was progressively eroded by a leadership change in 1997, due to prioritising cost-cutting and stock prices over safety. Where once no cost would be too high and no voice unheard to address safety concerns, a culture of mistrust and an unwillingness to speak up for fear of retribution became the norm. The resulting tragedies, impact on brand reputation, financial penalties and loss in market share will likely continue hurting Boeing for many years to come.
Once again, this clearly highlights the importance of leading a culture that supports what you promise your customers. Previously, airlines bought Boeing planes because of their exemplary safety standards and travellers boarded Boeings with the utmost confidence. However, once this trust is lost, it is almost impossible to win back. And when you lose your customers, your investors follow suit – whether or not you prioritised their dividends before.
The Benefits for Your Employer Brand
They say that charity starts at home, and this is also true in business. As illustrated above, when you start with engaging, enabling and supporting your employees, the benefits reach all the way to your investors. It’s no secret that engaged employees go the extra mile. Employees who are fully engaged show increased productivity by 17%, profits by 21%, and sales by 20%, as well as cutting turnover by 24% (GALLUP). According to Aon’s 2018 global engagement report, a five point increase in engagement leads to a 3% increase in revenue. Engaged employees feel respected, adequately compensated for their work, and have fewer office conflicts.
Engaged employees are also more likely to be brand ambassadors, portraying a strong and attractive brand to the market and other stakeholders – thus establishing their company as an employer of choice. Having a strong employer brand is a big competitive advantage. Not only does it help you to attract the best talent, but it also boosts retention and cuts down on expensive recruitment (and termination) costs. Since disengaged employees are 3.6 times more likely to leave, imagine how many resources companies can save on employee turnover by shaping an engaged workplace.
It is clear from the above that for businesses to generate sustainable value, profits must be the natural result of a healthy, engaging culture that is shaped at the outset from the most senior leadership levels. Make your organisation’s culture a priority, and your investors will reap long-term benefits.
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