Strategy & LeadershipHR EffectivenessCOVID-19: Employee satisfaction and shareholder value are at high risk

COVID-19: Employee satisfaction and shareholder value are at high risk

Ensuring your employees are happy and taken care of is of utmost importance during times of great duress, meaning shareholder value is at greater risk than ever. Alex Edmans, Professor of Finance at London Business School and author of “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”, tells you why and what HR can do about it.

Companies often claim that “people are our greatest asset”.  But this may just be marketing spin – its true objective is to maximise profit.  Traditional management thinking is that the value created by a company is represented by a pie, which is fixed in size.  So any slice of the pie given to workers means a smaller slice for shareholders.  A CEO’s goal, therefore, is to squeeze as much as possible out of employees. Indeed, Henry Ford became hugely successful in the 1920s by using the assembly line to force workers to keep up with the pace of production.

This pie-splitting mentality stills remains prevalent today.  Scandals at Sports Direct and BHS arose because these companies failed to pay the minimum wage or fund employee pensions.  Amazon’s value crossed the $1 trillion mark in February, but this value may have been created at the expense of workers.  Its warehouse working conditions involve long and intense hours, high injury frequency and little skill development.

Such human resource practices are highly damaging.  Not only to employees but, less obviously, to businesses themselves.  They contribute to income inequality and social unrest, and so citizens – and the politicians that represent them – are fighting back with proposals to heavily regulate business.  So leaders urgently needs another way to manage their workforces.

But the good news is there is another way.  The pie-growing mentality stresses that the pie is not fixed.  By investing in its workers, a company doesn’t reduce investors’ slice of the pie.  Instead, it grows the pie, ultimately benefiting investors, because these workers become more motivated and productive, and are more likely to stay with the firm.  The idea that the pie can be grown – that both employees and shareholders can simultaneously gain – might seem a too-good-to-be-true pipedream, so we need rigorous evidence to back it up.

That’s what I set out to do.  In my new book, “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”, I lay out the results of a study using 28 years of data, spanning a range of industries, on the effect of employee well-being on shareholder returns.  Measuring employee well-being is tricky, because it’s a holistic concept that can’t be reduced to a simple number.  Wages are important, but a company could pay high wages despite having scant attention to skills development – Ford paid his employees $5 a day, generous at the time.  So, I used the list of the “Best Companies to Work For”, which randomly selects 250 employees and surveys them on 57 questions spanning credibility, respect, fairness, pride, and camaraderie.

To isolate the effect of employee well-being, I stripped out the impact of a company’s size, industry, recent performance, and other factors that may have driven returns.  And I addressed the problem that it could be firm performance that causes employee well-being, rather than the other way round.  After all that blood, sweat, and tears, what were the results? I found that the Best Companies to Work For beat their peers by 2.3-3.8% per year – 89-184% when compounded over those 28 years.

What does it mean for practitioners? The key implication is that growing-the-pie is not pie-in-the-sky: investing in workers works for investors.  When I speak to companies on the importance of employee well-being, I’m introduced as a Professor of Finance and the audience often thinks they’ve misheard.  The finance department is frequently the enemy of HR, believing that it’s a cost centre and a distraction from profits.  But the results show that any finance department with this mindset is failing at its job.

What does this mean during the current pandemic?  Companies are under substantial pressure to cut costs.  Since employees are often viewed as a cost centre, they’re ripe for the chopping block.  But importantly my 28 years of data included recessions as well as booms, and the results held up in bad times as well as good.  It’s not at all the case that employee well-being is a luxury that should only be prioritised when you’re flush with cash.

Of course, the harsh commercial reality is that most companies can’t afford to keep all their workers.  While some politicians and the media may call on businesses to “do the right thing”, and argue that the “right thing” is to fire no-one, this simply isn’t realistic. Job cuts or furloughs may be necessary, and not taking these tough decisions may lead to a company going bankrupt – in which case, all jobs will be lost.  But what the research suggests is that it may well be good business sense to cut dividends, cancel share buybacks, and even scrap capital investments to reduce the losses imposed on workers.

And companies can think of innovative ways to minimise the pain felt by employees.  In early 2009, as the financial crisis hit, manufacturer Barry-Wehmiller lost 40% of its orders in a few days.  To avoid bankruptcy, it needed to save $10 million.  But rather than doing so by firing workers, everyone –from secretary to CEO – was required to take four weeks of unpaid vacation.  Not only did this safeguard workers’ jobs, but it also tried to ensure that their free time was used productively by putting on classes at its corporate university.  Moreover, this furlough was tradable, so employees who were more financially secure took double the load to prevent a colleague from having to take any.  Barry-Wehmiller ended up saving $20 million, double its original target, and morale soared.   In the current crisis, Qantas Airlines can’t pay its furloughed workers, because its business has been decimated.  But it’s developed an innovative partnership with Woolworths, a grocery store, to redeploy some of these employees.

And the Best Companies survey shows that treating employees fairly is not simply about throwing money at them, but anticipating and meeting their needs as humans – so all companies, regardless of their cash position, have a responsibility to treat them humanely.  Standard Chartered is providing mental wellbeing and support for those working from home in self-isolation.  Disney is maintaining the health benefits of the employees that it had to furlough since its theme parks and cruises are shut.  When companies have to make the toughest decision to lay off their workers, they can do so in the most respectful way possible – as Airbnb CEO Brian Chesky did last week.

Can words really make a difference when an employee has been laid off?  In fact they can, because I’m one of those laid-off workers.  For two years, I’d been a consultant on Socially Responsible Investing strategies for a large investment advisor, and they had to lay me off.  It was the Chief Investment Officer who notified me of the decision, in a face-to-face Zoom rather than a call or an email.  He told me it was nothing to do with my performance but exclusively due to business conditions, and that he hopes to restart the relationship when we’re through “the other side”.  The professional way in which he communicated the decision made the bad news easier to swallow.  I recognise that losing a consulting job is far less severe than losing one’s main job, but the principles of viewing an employee as a partner in the organisation rather than an input into production still apply.

The evidence shows that people are most companies’ greatest asset.  It’s up to business leaders to act accordingly.


Alex Edmans is Professor of Finance at London Business School and author of “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”.

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