The success of a new investment fund based on human capital factor scores supports research showing that happier employees can make businesses more profitable and financially successful
It’s long been discussed whether having a happier workforce is not only good for employees but could also be good for the company’s financial prospects. Now one asset manager is backing this hunch – and the growing body of research that supports this view – with its clients’ money.
US financial research firm Irrational Capital uses a mix of its own data based on employee surveys together with publicly available job review websites such as Glassdoor and Indeed to create ratings for publicly traded US companies.
Irrational Capital has developed what it calls “human capital factor scores,” the aim of which is to measure staff satisfaction in a clear, tangible way. Data points include how effective and innovative organisations are as well as an assessment of the emotional connection employees have to their work. The fund also uses more straightforward metrics such as remuneration, employment benefits and the work-life balance that employees achieve.
Using the highest human capital scores
The company’s product takes the form of an Exchange Traded Fund (EFT), a well-established investment vehicle. In this case it includes a range of large-cap stocks with the highest human capital scores.
So, how has it performed compared to other investments? Well, Irrational Capital’s Harbor Human Capital Factor US Large Cap ETF rose 12.3% in the first quarter of 2024, beating the Standard and Poor’s (S&P) 500’s gains of 11%. Its 30% increase across the whole of 2023 surpassed the S&P index, which rose by 26%. The fund has also beaten more than 90 per cent of similar funds since its launch in October 2022, according to financial research firm Morningstar.
Companies that have unhappy workforces are more likely to lose talent and to find that their staff are disengaged and are unwilling to put in discretionary effort. All of this can directly hit the bottom line.
Investors and employee satisfaction reviews
Earlier this year research by Durham University’s Business School revealed that “Companies with high levels of employee satisfaction are associated with stock prices that more accurately reflect the value of the company. This is due to increased positive employee reviews giving more insight to investors on a firm’s performance, compared to firms with unsatisfied employees unlikely to leave a review,” its researchers report.
They reviewed data on nearly 300,000 employee reviews from Glassdoor for companies listed in the S&P’s 500 index during the period 2008 to 2021. The study also found that the greater the focus on human capital of the company, the stronger the effect employee reviews have on stock prices.
“Investors have typically evaluated a company’s prospects by looking at its financial factors and industry news,” says Dr Anthony Kyiu, the lead author of the report. “There is however a growing understanding that non-financial data, such as employee reviews, can provide insightful information about a company’s internal operations and future performance.”
Having a positive rating from S&P and other agencies in the financial markets makes it easier for companies to borrow for investment and has an impact on their ability to trade as customers, suppliers and potential employees carry out their due diligence by checking these agency ratings. Being a well-run organisation with a focus on margins, growth and innovation can all help to improve these ratings.
But there’s also a growing library of sound financial data now to suggest that, today, investing in staff development and human capital can also bring significant returns and improve the way the financial markets view a company
