MCBASSI & COMPANY

How Investors Rank Companies

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Bottom line
How investors “grade” a company is almost identical to how the company’s employees grade it.

Implications

  • In a world of increasing transparency, where employees’ ratings of their employers are easily made public (see, for example, Glassdoor.com), shareholders’ interests are increasingly aligned with employees’.
  • Investor relations departments need to be paying more attention to what their company’s HR department is doing, and how that is being communicated to external stakeholders.

The Evidence
Over the past few years, we have been collecting data on how both employees and investors rate companies on 12 attributes measuring company actions and attitudes in three domains: Employers, Sellers, and Stewards (of the community and environment).  For example, one of the attributes measured in the Employer category was whether the well-being of employees was of great importance to the organization being rated.

After assessing each of the 12 attributes, the raters were asked to assign an overall Good Company grade from “A” to “F” to the company they were rating.  We then used combined data from all respondents to analyze statistically the relationship between each separate attribute and the overall company grade.  This made it possible to determine which attributes were, on average, of greater or lesser importance in shaping a respondent’s overall assessment of a company.

Our analysis found the relative importance assigned to the various attributes is virtually identical between investors and employees.  Items in the Employer domain are overwhelmingly the most important for both groups.  For both groups, all four Employer attributes are among the raters’ five most important attributes.

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Good Companies Keep Winning

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Our 2014 edition of the Good Company Index Report contains a hopeful message: the good guys keep winning.

The report is a follow-up study on the behavior of Fortune 500 companies, first published in our book Good Company: Business Success in the Worthiness Era. The report contains an updated Good Company Index (GCI), which we use to assign grades to nearly 300 of America’s largest companies based on their record as employers, sellers, and stewards of communities and the environment. The top-ranked companies in the Fortune 100 this year are Apple, Ford Motor Company, and United Parcel Service.

We also analyze company stock market performance based on the previous GCI grades we assigned in 2012. The results? On average, those companies with higher 2012 GCI grades significantly outperformed their industry peers in the two years that followed.  The median outperformance was 5.1 percentage points, with almost 60 percent of the higher-ranked companies outperforming their lower-ranked competitors.

Further, a live portfolio comprised of the top-scoring companies on the 2012 GCI, invested since October 2012, outperformed the benchmark S&P 500 average (total return, including dividends) by 17 percentage points in its first two years, ending October 1, 2014 (see figure below).  The Good Company Index is used by the Enterprise Engagement Alliance to manage both their Engaged Company Stock Index and their People Centric Annual Awards.

Be sure to check out the full 2014 Good Company Index Report for complete details on the latest ratings!
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What’s different about most admired companies?

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Fortune columnist Geoff Colvin explores what distinguishes “most admired” companies from their competitors.

His conclusion?  “They actually believe what every company proclaims about people being their most important asset,” displaying a greater long-term focus than other companies. 

Over the last two years, according to Colvin, companies at the top of the list were significantly less likely to have laid people off and less likely to have frozen hiring (or pay) than their competitors.  They were also much more likely to have branded themselves as employers, not just as marketers to consumers.

“People Management” in Fortune’s Most Admired Companies

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Fortune has released the 2010 version of its “World’s Most Admired Companies” list.

What are the top companies if you search by “people management” only?

  1. UPS
  2. Nike
  3. McDonald’s
  4. Walt Disney
  5. Intel
  6. Apple
  7. FMC Technologies
  8. Procter & Gamble
  9. Schlumberger
  10. Cisco

What do you think?  Sound right? 

Who else should be on the list?

The future is clear

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If you haven’t done so already, you definitely should take a look at www.glassdoor.com. This is an amazing web site, created by some incredibly visionary people (more on that later).

As its name implies, Glassdoor allows you to see inside—of companies. It has anonymous ratings of over 37,000 companies and their CEOs, based on “employee surveys.” (BTW, it also has salary information and the inside scoop on what job interviews are like at companies.)

A look around the Glassdoor site reveals that Southwest Airlines is the top-rated organization (no surprise there), followed by Mary Kay, General Mills and Slalom Consulting.

Here’s a feature I love. Glassdoor names names. At the end of 2009, Glassdoor listed the 25 companies with the lowest ratings (of those that had at least 25 ratings from U.S.-based employees within the past year). Guitar-maker Gibson Guitar was the worst-rated employer, followed by United Airlines (no surprise there) and staffing firm Spherion.

You might wonder why folks take the time to provide ratings of their employers. One of the major incentives that Glassdoor creates for doing so is that you have “to give to get.” In order to get the greatest level of inside detail, you have to provide information (fill out a survey) on your employer (or recent past employer).

Now a bit about Rich Barton, one of the founders of Glassdoor. I had the good fortune of doing a telephone interview with Rich for a book that I am writing (The Worthiness Era, or some such title) with several co-authors. I discovered Rich, who is also the CEO of Zillow, through Glassdoor. Zillow has incredibly high employee ratings, and so I called them up to ask for an interview with Rich. It was promptly and graciously granted, and talking with Rich was a true delight.

[Zillow is also a fascinating web site that you might want to check out, if you haven’t already done so. You can look up your house, or that of a friend or enemy, and get an estimate of its market value—along with square footage, number of bathrooms, etc.]

Rich is and has been a busy guy. In addition to being the Chair of the Board of Glassdoor, and the CEO of Zillow, he was a founder of Expedia. You may be beginning to see a pattern here. Rich’s purpose in life is to use technology to bring “power to the people.” He has the technology, the smarts, the vision, and the capital to do just that.

Transparency is here. It is real, it is unavoidable, and people love it.

Employers may try to resist, but there is no stopping this train. Firms will either learn to adapt and use transparency to their advantage, or not.

Ranking companies’ worthiness

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As part of our work on The Worthiness Era, we’re developing a quantitative “Worthiness Ranking” system which we expect to apply to every firm in the Fortune 100 (this will allow us to “name names” among our largest corporations, both positively and negatively). 

In calculating this score, we’ll evaluate each company’s behavior in five different realms:

  • Employer
  • Customer focus
  • Sustainability
  • Absence of greed
  • Contribution

Whenever possible, we’re planning to use publicly-available information as the source for each of the five indicators that combine to yield a company’s “Worthiness” score. 

In future blog entries, we’ll explore some of the details of each of the five indicators.  (In the meantime, let us know if it looks like we’ve missed any major categories.)