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New research shows meaningful work may improve profits

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      By Calvert Research and Management

      Washington - Do positive attitudes in the workplace lead to positive bottom-line impacts? Is there a measurable link between employees' sense of purpose at work and a company's financial results? The findings in the most recent Serafeim-Calvert research paper, "Managing human capital: How purpose-driven employees help power profitable companies," suggest this is the case.

      The study, authored by Harvard Business School professor George Serafeim in collaboration with Calvert, surveyed about 500,000 employees in 429 firms on a variety of work-related topics. The research found a link between employees' reported sense of purpose and two common performance metrics — future return on assets and Tobin's Q (total assets plus market value of equity minus book value of equity at calendar year-end overtotal assets). The link did not exist uniformly across all companies — just among those where management conveyed clear expectations and empowered employees to succeed; i.e., provided clarity. Further, the link was not driven by senior management, but by midlevel managers who work more directly with employees.

      Only those organizations with high scores in both purpose and clarity exhibited superior financial performance in some sectors. Notably, camaraderie among employees (e.g., fun and family-like work environments) did not appear to affect financial results.

      Calvert Blog 5-10-19

      Companies with high purpose were those where employees said they have a strong sense of the meaningfulness and collective impact of their work. They take pride in what they accomplish, feel their work is more than "just a job" and are happy about the ways in which their employers contribute to the community.

      Importantly, the study provides evidence that a company's management of its workforce, or human capital, may be as critical to success and profitability as its working financial capital.

      Calvert's mission to better measure human capital management

      In our view, human capital -- and in particular, an engaged workforce -- can be one of the most important material environmental, social and governance (ESG) factors for many industries.

      Accordingly, we sought to explore whether the two key motivators identified in the Serafeim research — purpose and clarity — could be accurately measured and translated into investment models.

      Of the two concepts, clarity proved easier to quantify. Using our proprietary, data-driven ESG research system, we were able to identify tangible key performance indicators (KPIs) that pointed to clarity within an organization. These included regular career development interviews, ongoing employee feedback and investment in training. All of these may signal to investors that employees have the appropriate guidance and tools in place to do their jobs well.

      In contrast, the idea of purpose was more intangible and difficult to measure. Although companies are increasingly using engagement surveys, as well as employee-reported feedback aggregated through third-party websites, both investors and companies see limitations in the consistency and use of this type of data.

      Despite such shortcomings, we extracted human resource indicators broadly used in our investment models, and tested the specific data set against return on assets (ROA), return on invested capital (ROIC) and return on equity (ROE). For two sectors — financials and information technology — our tests found a strong positive link between a company's management of people and fundamental financial performance. In remaining sectors, our tests did not find a significant positive or negative link.

      Information available to investors on human capital management continues to evolve, driven by advances in management strategy, better understanding of meaningful metrics and greater corporate disclosure. As such, data today is inconsistent and incomplete. Calvert views it as an attractive source of alpha that we can capitalize on with our expertise and commitment.

      Read the full research findings and Calvert's approach to measuring human capital management in "Managing human capital: How purpose-driven employees help power profitable companies."

      Bottom line: This study indicates that some companies with employees that have a clear sense of purpose exhibited superior financial performance. Calvert believes that an engaged workforce can be one of the most important material ESG factors for many industries.