Glassdoor Ratings Might Predict Stock Market Outperformance

The quality of management may be difficult to assess, but one easy metric has proven to have a correlation with management quality and share price returns.

Apr 26, 2014 at 10:00AM

Evaluating a company's management is tricky. There are lots of subjective ways to look at resume, tenure, share ownership, compensation, and qualitative characteristics to judge the quality of management. Since management quality and alignment with shareholder interests are critical to investing success, many investors can be frustrated by the difficulty in assessing management prior to making an investment. One very easy metric, CEO approval ratings as measured by Glassdoor.com, demonstrates strong correlation between management quality and share performance.

To illustrate, here is a look at the three highest-rated CEOs of public companies within the consumer goods space as measured by Glassdoor. This list includes the leaders of Costco Wholesale (NASDAQ:COST), Starbucks (NASDAQ:SBUX), and Apple (NASDAQ:AAPL).

Different businesses, similar results
Glassdoor's ratings are based on anonymous employee feedback. While not a scientifically selected sampling, this data provides real behind-the-scenes intelligence about how employees feel about their leadership. This information not only provides insight into a leader's ability to motivate and lead a workforce, but also has a clear connection with employee satisfaction and the quality of the work done by satisfied employees. Insight derived from these ratings is useful to investors in a wide range of industries, ranging from a food service company making lattes to a warehouse selling a lifetime supply of paper towels.

Let's look at Craig Jelinek, CEO of Costco and 6th highest-rated CEO on Glassdoor with a 95% approval rating. Costco's philosophy places emphasis on treating its employees well and the benefits are clear; Costco has employee turnover of just 6%, which is remarkable compared to Wal-Mart's turnover of more than 20%. Happy employees also create a positive customer experience, which is the driver behind Costco's impressive 87% membership renewal rate. With satisfied employees and customers, it should be no surprise that Jelinek has followed in the footsteps of former CEO Jim Senegal in driving market-beating results:

COST Total Return Price Chart

COST Total Return Price data by YCharts

Wide ranging success
Ranked 9th by Glassdoor, Starbucks' CEO Howard Schultz has inspired his management team to generate tremendous growth. This growth has been broad, with domestic location expansion, international expansion, and significant menu expansion to include juice, tea, soda, baked goods, sandwiches, and single-serve coffee at home. At Starbucks' annual meeting, Schultz suggested that there is more growth to come, stating "We're still in the early stages of the growth and development of Starbucks, we're delivering record profits and revenue, sharing our success with our partners and heading toward a $100 billion market cap."

A market cap of $100 million would represent almost double Starbucks' current market cap of $53 billion, and would be a continuation of a strong track record of market-beating performance:

SBUX Total Return Price Chart

SBUX Total Return Price data by YCharts

Great CEOs can have different styles
Steve Jobs was a legend, and clearly has an impact on Apple more than two years after his death. However, Apple has continued to grow and succeed thanks to his successor, Tim Cook. Cook's 92% approval rating is 18th highest according to Glassdoor and is a clear indicator of Cook's operational expertise, ability to motivate employees, and also calm the anxiety of investors following the passing of Jobs. Since Cook joined Apple in 1998, he's had far more to do with the success of the company than many give him credit for, and that success has continued in recent years including returns of 45% since Jobs' death and significant market outperformance over the past five years:

AAPL Total Return Price Chart

AAPL Total Return Price data by YCharts

Starting to see a trend yet?
The correlation between highly rated CEOs and stock performance continues. The next five highest-rated consumer goods CEOs of publicly traded companies follow the same trend:

EBAY Total Return Price Chart

EBAY Total Return Price data by YCharts

The key takeaway is that this linkage is not limited to CEOs of high-flying growth companies. While high-profile leaders like Amazon.com CEO Jeff Bezos and Chipotle Mexican Grill CEO Steve Ells are also on this list, media conglomerates like Disney and retailers such as Nordstrom have also had great success beating the market thanks to the leadership of well-liked CEOs. In fact, Best Buy CEO Hubert Joly is the only consumer goods executive on the list whose company has not outperformed the S&P 500 over the past five years. 

Based on this data, Glassdoor represents a simple yet powerful way to assess the quality of management when making an investment decision.

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Brian Shaw owns shares of Amazon.com, Apple, Chipotle Mexican Grill, Costco Wholesale, Starbucks, and Walt Disney. The Motley Fool recommends Amazon.com, Apple, Chipotle Mexican Grill, Costco Wholesale, DirecTV, eBay, Starbucks, and Walt Disney. The Motley Fool owns shares of Amazon.com, Apple, Chipotle Mexican Grill, Costco Wholesale, eBay, Starbucks, and Walt Disney. 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.

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