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:

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.

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