A happy shop is a productive shop. And such a business gives the best returns for investors. That is the thesis of a new study from U.K. asset manager Schroders plc, providing a framework for quantifying how companies’ use of their human resources affects their stock market prospects.
Measuring human capital—defined by the Organization for Economic Cooperation and Development as the skills, knowledge and other characteristics that result in productivity— has never been easy. The study from Schroders, in collaboration with Saïd Business School, University of Oxford, and the California Public Employees’ Retirement System, attempts to do that and to go one step beyond by showing a connection between human capital and investment returns.
“As the corporate landscape evolves in a more volatile market, a company’s workforce is integral to its performance,” said Marina Severinovsky, head of North American sustainability at Schroders, in a statement.
She added, “However, the market has lacked distinct, quantitative ways to analyze these factors as tangible assets. This research allows us to identify companies that are leaders and laggards in human capital management to make informed allocation and engagement decisions.”
The Schroders report crunches significant data to arrive at numbers it then uses to assess how investment returns are affected. Factors measured include salaries, benefits, stock compensation, lost days, turnover and training. Other things go into the mix, too, such as 1) the difference between a company’s employee average pay and that elsewhere, and 2) net operating profit after tax, divided by fixed assets and net working capital.
There have already been many studies gauging human capital in terms of training, spending on employees and expected company earnings. These different approaches are often at odds with each other, according to a paper last year from the National Bureau of Economic Research.
The Schroders study aims to tie these together and thereby track their impact on investment returns. Thus, “companies with strong human capital management are likely to be more capable of navigating the future effectively,” said Angus Bauer, the firm’s head of sustainable research, in the statement.
The study references investing guru Benjamin Graham’s term “margin of safety,” which is how much a company is undervalued in the stock market. In the report, a dot plot shows unnamed companies with a Schroders human capital management score higher than their market valuation.
Schroders’ method is a challenging one. As the report noted, it “knocks on the door of a different approach to understanding the creation of value.”
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Tags: benefits, Benjamin Graham, California Public Employees’ Retirement System, human capital, profit, salaries, Schroders, Stock Market, University of Oxford, valuation