Intangibles, Equity and Seeing Past Short-Term Blind Spots

Wharton finance professor Alex Edmans recently published a very interesting paper: “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Edmans compares the stock prices of companies on the Fortune “Best Companies to Work For” lists going back to 1984 to similar firms in the same industries and the broader market as a whole. Edmans summarizes:

“This paper documents statistically and economically significant long-horizon returns to portfolios containing companies with high employee satisfaction. These findings imply that the market fails to incorporate intangible assets fully into stock valuations – even if the existence of such assets is verified by a widely respected survey.”

I’ve blogged about this before here and here. Eric Mosley, our CEO, participated in a roundtable hosted by Chief Executive magazine on the value of intangibles. The Forum for People Performance Management and Measurement also found that 85% of a company’s assets are in “intangibles.” If, as is standard, Wall Street firms are valuing companies based only on tangibles, then much of the picture is being ignored.

What does this mean? Per Edmans, “An investor could have earned significant risk-adjusted returns by trading on the Fortune list.” I’ve studied similar research that shows an investor could have earned above average returns by investing in companies shown to have higher employee satisfaction levels (as measured via the Best Places to Work Survey) than if they simply invested in S&P index, for example.

Another concerning point Edmans raises is: “Even if managers believe employee satisfaction enhances long-term corporate performance, the may not act on their beliefs because investing in employees often reduces earnings in the long run.”

This is why executive sponsorship of long-run performance enhancing programs such as strategic employee recognition is critical. Without executives standing up to Wall Street and enforcing recognition targets with managers, short-term thinking will continue to rule. This and other change management practices are necessary to instill a culture of appreciation across a company.

What are you doing to support long-term high performance results over short-term goals? Do you believe your company has this kind of foresight? Are you in a position to affect change? Share your best practices in comments.

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