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 2013, the three-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.
Every year on the anniversary of the Index, we examine all “industry-matched pairs” (pairs of companies in the same industry, both of which have detailed Good Company grades from the most recent set of grades), examining companies’ stock performance differences for those pairs 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 the pairs of companies that met this criterion (seventeen pairs in 2013 based on 2012 grades, twelve pairs in 2011 and 2012 based on 2010 grades), the stock price of the company with the higher grade outperformed that of its competitor with the lower grade by an average of over 40 percentage points cumulatively over the 3-year period following the assignment of Good Company grades (an average annualized outperformance of over 10 percentage points).
Those companies with higher Good Company grades significantly outperformed in the first two years, followed by a more modest outperformance in the third year.
As a specific example, the stock value of IBM (Good Company grades of B+ in 2010 and B- in 2012) increased by a cumulative 67.0 percent during the 3-year period, compared to a decrease of 45.4 percent in Hewlett Packard (grades of C and C-) over the same time, for an outperformance by IBM of more than 112 percentage points.
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 an investment company once run by Good Company authors Bassi and McMurrer) were selected based on how well companies manage and develop their employees, with these portfolios also outperforming 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).