2024 Third Quarter COMMENTARY

Last quarter I discussed the evidence and myths within socially responsible investing.  Here, let’s dig into the social part of ESG investing and the Harbor Human Capital Factor funds.  I spoke with Dan Ariely, the brains behind the funds and a professor at Duke University.

Human capital is difficult for investors to value.  In the capitalist system, people are a factor of production that leverage capital to business advantage. Sounds accurate, right?  We can analyze financial statements, not so easy to assess the qualities of the workforce and measure employee motivation.  Employees who are dissatisfied will go elsewhere, destroying potential business value.

The Human Capital fund’s manager utilizes a private survey of 400 public companies, along with two thousand companies that have data on the Glassdoor social media site, which invites employee to leave feedback on their employers. Let’s look at a few observations that arise from this data:

​It’s not how much you’re paid or how complacent or “satisfied” you are but it’s all about the culture you work within and the people you work with.  Pay and work benefits are important, just not what accelerates profitable companies.

More women on boards and the statistic of women as a percent of workforce are zero correlated with employee satisfaction about gender fairness.  Instead, a better measure for driving investment return is taking the temperature for how women feel about their work environment, whether they are being treated fairly and are empowered to pursue opportunities.  Female employees very often know the deal on gender equality, and their scoring on satisfaction is not affected by appointing women to the board of directors nor hiring additional women, if further changes in culture and behavior aren’t made.

When satisfaction declines in a dynamic company, employees head for the exits and human capital collapses.  Yesterday’s high growth company can become tomorrow’s dinosaur.

Moving on, a company hired the creator of the Human Capital Index to study the effectiveness of pay bonuses.  The company was divided into three groups to rewards employees who achieved performance targets.  In one, employees were delivered a pizza as a thank you for their work, another group were given a gift card, and a third the right to gift someone else a gift card.  The most satisfied?  The second group, the one where employees enjoyed being given the ability to decide what to buy.

In another study, a company wanted to know how to motivate high achieving employees.  Supervisors either congratulated all employees as a group for accomplishing team goals, rewarded high achieving employees only or gave a small bonus to low achieving employees only.  High achieving employees surveyed afterwards expressed dissatisfaction when low achieving coworkers were rewarded, and they were not.  It’s really a matter of finetuning the cultural messages behind rewards.

Not to say such weak signals (less valuable for increasing investment returns) about employee satisfaction in training or compensation don’t matter, it’s that they are the cost of doing business, rather than factors that lead to a business outperforming other companies.  If employees are dissatisfied with compensation or training programs, it leads to obvious problems.  However, it’s more complicated with how that connects to investment returns.  If employees see unfairness in compensation or the running of training problems, that’s a problem for employee satisfaction.  Those who achieve more yet believe their compensation or training lags accordingly will be dissatisfied.  They might either leave the company or decrease the efficiency or effectiveness of their work.  Does this resonate with you?

That said, there are many who plug away regardless of what happens around them.  Strong signals driving investment returns include employees’ perception of:

Management
Right direction
Psychological safety
Alignment of values
Diversity of perspective
Career development
Autonomy
Trust
Effectiveness
Motivation
Purpose
Fairness
Pride

Evidence shows employees create more economic value when they feel their workplace is fair, dynamic.  They believe in the mission and value motivating what they do.  Pay is the least critical factor.  Intrinsic, cultural factors were more important.  A top-performing business pays attention to its culture.