How Researching Company Culture Can Boost Stock Market Returns

Looking for a higher return on your investments in the stock market? If so, you may want to start considering company culture.

When it comes to making money in the stock market, most individual investors focus on share price, earnings and growth targets and give little thought to intangible things like company culture and employee sentiment. Most assume financials are always what matter most, without recognizing how great company culture can be an indicator of a high performing stock.  In fact, new Glassdoor research shows companies named ‘great places to work’ by third-party organizations that compile lists based on employee feedback - whether a company is among Glassdoor’s annual “Best Places to Work” report or on Fortune’s 100 ”Best Companies to Work For” list - handily outperform the stock market. This research also shows the opposite happens if a company ranks poorly, according to employee feedback - instead of outperforming the stock market, they tend to significantly underperform.

The numbers are striking. Investors who bought shares of the companies on Glassdoor’s “Best Places to Work” list in 2009 and held them through 2015 would have outperformed the S&P 500 by 122.3 percent.  A $1,000 investment would have grown to $3,470 five years later. Results also show that being named a “Best Place to Work” between 2009 and 2014 led to a roughly 0.75 percent jump in the share price during the 10 days after the announcement of the report. That may not seem like much, but if annualized, that’s equivalent to a roughly 31 percent return.

The research also looked at 30 public companies with the lowest overall ratings as of Jan. 31, 2015 and found poorly rated companies underperformed the stock market by a wide margin. From 2009 to 2014, the S&P 500 lodged a 121 percent return. Low ranked companies saw a return of just 91.5 percent.

So how can investors go about gauging the culture of a company to make a well-rounded and informed decision about an investment? Here are three tips to keep in mind when evaluating a company’s culture and determining how it relates to which companies you invest in, or steer clear of:

1. For starters, it’s important to look at company ratings and reviews shared by employees. For instance, the average company rating on Glassdoor, based on more than 340,000 companies, is a 3.2 (Company ratings on Glassdoor are based on a 5.0 scale; 1.0=very dissatisfied, 5.0=very satisfied). If the company is rated above that, you know it’s an above average company when it comes to employee satisfaction. If it’s below this average, you may want to think twice.
2. While insider trading may be illegal, it’s not against the law to research what employees are saying about a company. In fact, it can be particularly handy in finding the right companies to invest in. The Internet and social media have given employees at all levels of an organization a voice, and that voice can easily be found on Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Glassdoor to see what employees have to say about the companies they work for.  Use the research not only to get a sense of employee sentiment, but also to see what may be on the horizon for the business. That can be a clear indicator of upward or downward momentum at the company.
3. One of the most valuable tools in determining company culture is your own network of family, friends and professionals. Thinking about investing in a particular company? Then ask someone who currently works there to find out what it’s like inside, including how they believe the company is doing in terms of short-term and long-term financial and business performance. And don’t forget to ask about employee morale.  

At the end of the day, making sound investment decisions means considering more than just company financials. Earnings, analyst estimates and growth targets certainly matter. But without a talented and motivated workforce behind a company moving it forward, chances are none of those tangible indicators will fall into place to help you reap the very best financial returns as possible.

Dr. Andrew Chamberlain, Ph.D., is Chief Economist at Glassdoor.

He is an applied labor economist who has written widely on labor markets, public policy, taxation and energy policy. Andrew previously taught economics at the University of California at San Diego, was chief economist and founder of Columbia Economics, LLC. He has served as an economist in Washington, D.C. at the Tax Foundation and the Cato Institute, as a municipal government economist at the City of Seattle. Andrew received his Ph.D. in economics from the University of California, San Diego and holds BAs in economics and business administration from the University of Washington in Seattle.