Why Investors Should Pay Attention to the Best Employers

Last week, I profiled Lincoln Electric, a company that hasn't laid off any employees for lack of work since at least 1948. Not coincidentally, Lincoln has outperformed the S&P 500 since its initial public offering in 1995 and over the past 10-, five-, and one-year time frames.

I also mentioned the investment philosophy of Fool CEO, co-founder, and Stock Advisor co-advisor Tom Gardner: "The most important factor I look for in an investment is how a company takes care of its employees and what sort of culture it is developing."

Tom elaborated:

In the role of CEO for the last handful of years, I now see more clearly how critical it is to create performance-based environments for creativity, collaboration, debate, adventure, and delight. The great companies drive dynamic commercial results by thinking in systems, motivating their people toward mastery, and learning quickly from mistakes. The last few years have made it clearer that healthy environments are what lead to superior performance over 5-10 years, and beyond (ideally, for decades).

Some numbers to back it up
The team at the Great Place to Work Institute, which compiles Fortune's annual list of the 100 Best Companies to Work For, studied the stock performance of companies that make the annual Fortune list. The results:

Fortune List Versus Market Indexes, 1998 to 2010

Returns

Fortune 100 Best Companies to Work For, Reset Annually*

11.06%

Fortune 100 Best Companies to Work For, Buy and Hold*

6.68%

S&P 500

3.83%

Russell 3000

4.26%

Performance data from the Great Place to Work Institute, Inc. Returns measure "annualized performance of the 100 Best in two different portfolios – one that is reset annually and one that comprises the original 1998 100 Best public companies."

The intangibles
If a company has created a workplace culture that fosters collaboration, mastery, and innovation, that should serve as a powerful competitive advantage.

Recently, I spoke with Frank Koller, who chronicled the no-layoffs story of Lincoln Electric in his book Spark: How Old-Fashioned Values Drive a Twenty-First Century Corporation.

Koller shared a quote from Lincoln Electric CEO John Stropki, who was explaining the rationale behind the company's employee-friendly culture:

I don't think of how we operate as a social responsibility. We can perform in an economically challenging environment, but spread the pain in a way that long term will better represent our shareholders' interests without crucifying our employee base and it will be the best option for our customers. That's good business; not bad business.

Eight of the most famous words in investing
It goes without saying that past performance is no guarantee of future results. Still, I thought it would be worthwhile to look at the top 10 companies from Fortune's 100 Best Places to Work for 2011:

  1. SAS (private)
  2. Boston Consulting (private)
  3. Wegmans Food Markets (private)
  4. Google (Nasdaq: GOOG  )
  5. NetApp (Nasdaq: NTAP  )
  6. Zappos.com (subsidiary of Amazon.com (Nasdaq: AMZN  ) )
  7. Camden Property Trust (NYSE: CPT  )
  8. Nugget Market (private)
  9. REI (private)
  10. Dreamworks (Nasdaq: DWA  )

24/7 Wall Street ran an interesting story on possible conflicts of interest in the Fortune list, so for a different way of measuring employee satisfaction, let's also look at the Glassdoor.com Best Places to Work Employees' Choice Awards (2011):

  1. Facebook (private)
  2. Southwest Airlines (NYSE: LUV  )
  3. Bain (private)
  4. General Mills (NYSE: GIS  )
  5. Edelman (private)
  6. Boston Consulting (private)
  7. SAS (private)
  8. Slalom Consulting (private)
  9. Overstock.com (Nasdaq: OSTK  )
  10. Susquehanna International Group (private)

I don't think investors should go and buy the public companies in these lists simply because of their presence on the list.

The lessons are more general: Companies that create a positive workplace culture for their employees more often than not make their customers and shareholders happy, too. Fundamental investors should pay attention to that trait (and one easy way to do so is by monitoring lists like those presented above) when assessing a stock.

Looking for more stock ideas? Click here for free access to The Motley Fool special report, "13 High-Yielding Stocks to Buy Today."

Fool.com managing editor Brian Richards does not own shares of any of the companies mentioned. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, Southwest Airlines, DreamWorks Animation SKG, and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2011, at 3:57 PM, DaveGruska wrote:

    "past performance is no guarantee of future results" is eight words.

    Good article, though.

  • Report this Comment On June 27, 2011, at 4:51 PM, TMFBrich wrote:

    @streeter123,

    Egads. Fixing immediately ... thanks for the catch.

    Foolish best,

    Brian Richards

  • Report this Comment On June 27, 2011, at 5:01 PM, tom2727 wrote:

    Seems like you need to take these "best places to work" surveys with a grain of salt. They leave out a lot of companies simply because they never survey them. Sometimes I think it's like those list of "top high school graduates in the USA" books which are "highly selective". Basically those who pay a fee to get their name in the book are "the top graduates".

    So regarding methodology, here's the best I could find from the Forbes website:

    "How do we put the list together? Simply stated, we ask the employees themselves. We partner with the Great Place to Work Institute to conduct an extensive survey of hundreds of employees at each company. "

    So they survey employees from which companies now? If these are the top 100, that's top 100 of how many surveyed? 1000? 500? 150? Which surveyed companies didn't make the top 100? Nothing is disclosed as far as I can find.

    I work for a great company. They are public with a > 10b market cap and >2000 employees. Not on the list, and as far as I can tell not surveyed. No pay, no play I guess.

  • Report this Comment On June 27, 2011, at 5:04 PM, JGBFool wrote:

    Don't invest in my employer. (I won't divulge who it is, but most serious investors would avoid that investment anyway, except indirectly via index funds.)

  • Report this Comment On June 27, 2011, at 9:07 PM, samedge2 wrote:

    Here here, Tom2727.

    Another perspective for you: I worked for a major specialty coffee retailer for a decade and a half and there is an entire TEAM working on surveys and etc. in regard to how the company stacked up versus the multitude of "best place to work lists" (AKA - ensuring the company stayed ON IT).

    Needless to say, 90% of the people I know have left said company (pretty easy to guess who it is) and the company is being widely lauded as the turnaround story of the year in the PNW.

    A well-run business? Yes, in some respects.

    A great place to work? No chance.

  • Report this Comment On June 28, 2011, at 10:27 PM, coolusername wrote:

    Great article (the 24/7 Wall Street one was even better). I also work for a company on the Fortune 100 Best Places to Work list, a fact which the company is enormously proud of and blows its horn about often. I had always suspected the list was somewhat of a farce, and there was a decent amount of politicking and back scratching going on to stay on the list.

    It's certainly not a bad place to work, and given what's going on in the broader economy I've got nothing to complain about. However, relative to the companies we actually compete with for talent, I think we're pretty average for our industry, which has resulted in employees lost due to poaching by other companies and prospective hires lost to competing offers. Ours is a very competitive industry, so most everyone treats their employees well or risks losing them.

    I think my biggest gripe at the moment is that the pointy haired bosses seem to be taking over. But I'm pretty sure that question doesn't show up in the survey, so it appears that all is well.

    This company also sends out mass emails to all employees encouraging us to vote for the company in industry awards. How prestigious are these awards if they can be won by stuffing the ballot box?

    Moral of the story: don't put much faith in these types of surveys and awards. They're mostly marketing and politics.

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