A growing body of evidence shows that companies can do well by doing good. Meanwhile, current economic, social, and political forces across the globe are changing the very shape of the playing field on which companies compete. Being a good company is rapidly becoming a fundamental and necessary element in the drive for companies to survive and thrive.
OUR LATEST FINDINGS: The grade that a company earned on the Good Company Index™ is a powerful predictor of stock prices. In June 2012, the two-year anniversary of the creation of the Good Company Index (we assigned our first Good Company grades in June 2010) afforded us the opportunity to check in again on the stock market performance of “Good Companies,” those earning high marks as employers, sellers, and stewards of communities and the environment, relative to their less worthy competitors.
As we did last year on the one-year anniversary of the Index, this year we again examined all “industry-matched pairs” (pairs of companies in the same industry) in the Fortune 100 in which the companies’ Good Company grades differed by one or more full grade levels (for example, a grade of B versus a grade of C).
Across those twelve pairs of companies that met this criterion, the stock price of the company with the higher grade outperformed that of its competitor with the lower grade by an average of 30.2 percentage points over the 2-year period following the assignment of Good Company grades (an average annualized outperformance of over 14 percentage points).
Those companies with higher Good Company grades significantly outperformed in the first year and then further extended that outperformance in the second year. In addition, we found that in 83 percent of the pairs (10 of 12), the higher-ranked company outperformed the other over the 24-month period.
For example, the stock value of IBM (Good Company grade of B+) increased by a cumulative 58.4 percent during the 2-year period, compared to a decrease of 53.4 percent in Hewlett Packard (grade of C) over the same time, for a 111.8 percentage point outperformance for IBM. Similarly, Verizon (grade of C+) outperformed AT&T (grade of D+) by 21.7 percentage points during that period, 76.5 percent to 54.8 percent. Seems it continues to pay to be good!
Other evidence points in the same direction, and includes the following:
- From 1997 to 2010, the average annual stock market return of companies on the Fortune list of Best Companies to Work For outperformed the standard US stock benchmark (the S&P 500) by over 7 percentage points per year.
- Multiple portfolios operated by Bassi Investments (run by Good Company authors Bassi and McMurrer) and selected based on how well companies manage and develop their employees have also outperformed the S&P 500 since their inception (the oldest portfolio was created in 2001)
- A study of firms five years after an initial public offering (IPO) found that investments in human resources represented the strongest predictor of firm survival (more important than net profit per share or industry type)