MCBASSI & COMPANY

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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Do our Good Company ratings predict stock performance?

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Yes.

The grade that a company earned on the Good Company Index™ is a powerful predictor of subsequent stock performance.  We examined this question this summer, one year after we assigned company grades, to see how companies had fared in the market over the 12 month period that had followed.

To ensure that we were comparing only similar companies to one another, we looked at all “industry-matched pairs” (pairs of companies in the same industry) in the Fortune 100.  We found twelve pairs in which the companies’ Good Company grades differed by one or more grade levels (for example, a grade of B versus a grade of C).

Across those twelve pairs, the stock price of the company with the higher grade outperformed that of its competitor with the lower grade by an average of 19.8 percentage points in the subsequent 12-month period.

For example, in June 2010 (when we finalized companies’ grades), Walgreen and CVS Caremark’s Good Company grades were a B- and D, respectively.  In the 12 months following the assignment of those grades (June 2010 to June 2011), Walgreen’s stock price outpaced that of CVS by 30.7 percentage points.

Another example is Chevron and ExxonMobil: in June 2010, the companies’ grades were C+ and F, respectively.  Between June 2010 and June 2011, Chevron’s stock return was 6.0 percentage points higher than that of ExxonMobil.

These are exciting findings for us.  One of the main themes of our book is an exploration of the direction the world will be moving in the future, but this represents evidence that being a good company is already paying off.

This post originally appeared on the Good Company blog earlier this week.

 

Human capital management predicts stock prices

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In 2001 and 2003, under the auspices of our sister company (Bassi Investments, a registered investment advisory firm), we launched two different investment portfolios.  The investment strategy for these portfolios rests on our research finding that firms making significant investments in formal learning and development for their employees subsequently outperform the market.  In the table below, these are portfolios A and B.

In 2008, we launched four additional portfolios, based on broader concepts of human capital management, which we refer to as Portfolios C to F.  We use a variety of selection criteria for these four newer portfolios, including evidence of being a “good employer” and an unusual degree of commitment to talent management systems. 

The performance of these six portfolios, relative to the S&P 500, is summarized in Table 1.  Overall, the average (weighted) performance of these portfolios relative to the S&P 500 is +4.7 percent per year.  Additional information is available in our issue brief on this topic.  It is important to note that with the exception of Portfolios A and B, the track record of these portfolios is relatively short.  And, of course, past performance is never a guarantee of future returns.

Having said that, the results support the conclusion that human capital management is fast emerging as an essential core competence (possibly the essential core competence) for organizations.  Interestingly, although the firms we hold in our portfolios are among the world’s leaders in human capital management, our analysis indicates that even these companies, on average, are still relatively unskilled at measuring and optimizing their investments in human capital.  So there’s still room for improvement – and still time for other organizations to catch up.

NOTE:  Reported portfolio performances do not include fees or expenses and are based on tracking statistics provided by account custodian. S&P 500 does not include dividends.  Contact Bassi Investments for additional information.

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