Skip to main content

You are here

Blog Listing Page

Great places to work are great performers

By: Catherine Yoshimoto, senior product manager at FTSE Russell, and Ed Frauenheim, director of research and content at Great Place to Work

The latest edition of the annual FORTUNE 100 Best Companies to Work For list affirms once again that great workplaces benefit from stronger financial performance, reduced turnover and better customer and patient satisfaction than their peers. Produced in collaboration with research and consulting firm Great Place to Work®, the annual list is based on the most extensive employee survey in corporate America. Anonymous input from 315,000 employees on leader quality, support for professional and personal lives and colleague relationships comprise a Trust Index to compare organizations against peers. The companies that make the list are known for their employee satisfaction but, importantly, generate strong business performance year after year.

The outperformance is notable. Global index provider FTSE Russell – which annually analyzes the FORTUNE 100 Best Companies to Work For list – this year found that an equally-weighted index of the publicly-traded companies among the 100 best returned 11.66% annually from 1998 through the end of 2016, nearly 5% more than the equivalent returns for the benchmark US all-cap Russell 3000® Index (6.72%) and US large cap Russell 1000® Index (6.68%). How can an index outperform the market by 5% over nearly 20 years? We believe this can be attributed to art and science.

First, the art. A wide body of research and evidence supports the fact that engaged employees make for happy and successful companies. Caring and high-trust company cultures with a sense of purpose and clarity are consistently associated with strong revenue and stock performance. In their forthcoming book, A Great Place to Work For All, CEO Michael C. Bush and the research team of Great Place to Work argue that leading companies are racing ahead because they bring out the best in every employee, regardless of who they are or what they do for the organization. “Business success relies on developing all your human potential,” Bush and his co-authors write. “Every employee matters in an economy that is about connectivity, innovation, and human qualities like passion, character, and collaboration.”

Great Place to Work’s new methodology—baked into the rankings for this year’s FORTUNE 100 Best Companies to Work For list—rewards companies that create a consistently great culture across demographic groups and job levels. Bush and crew also have documented business advantages such as revenue outperformance for these new “Great Place to Work For All.” The way the 2017 Best Companies to Work For tap everyone’s potential may explain the bump in stock performance this past year (see chart below). 

The idea that “when companies take care of employees, employees take care of the business” isn’t new and may seem obvious to some. But as the FORTUNE 100 Best Companies to Work For show, it can play a critical role in performance. Don’t underestimate the power of culture.

Next, the science. When FTSE Russell creates its index of the publicly traded FORTUNE 100 Best Companies to Work For, it has a stellar crop of companies to measure. And the “100 Best Index,” a hypothetical index created by FTSE Russell specifically for FORTUNE and Great Place to Work, is updated each year based on last year’s winners, ensuring it is continually refreshed with strong companies. Yet FTSE Russell takes its analysis a step further by equal weighting and quarterly rebalancing this hypothetical portfolio. Through equal weighting, all constituents are assigned the same index weight, regardless of market capitalization, to ensure that the largest companies don’t have an outsized impact on index performance. Quarterly rebalancing is a way to systematically reweight the index to adjust for market performance.

Equal weighting with systematic rebalancing has historically delivered strong relative returns over time. In fact, in the case of the 100 Best Index, when FTSE Russell performed an attribution analysis to determine the source of excess return for the 100 Best Index over the broad market, 80% of the excess return was due to the selection of the 100 Best companies but an additional 20% can be attributed to the equal weighting and quarterly rebalancing methodology of the 100 Best Index.   

Investors can benefit from this simple formula. Bring together the art of recognizing cultures that are great for all their people, as well as the science of smart portfolio construction.

A version of this article was first published on Fortune's web site February 27, 2018.

Catherine Yoshimoto is senior product manager at global index provider FTSE Russell. Ed Frauenheim is director of research and content at Great Place to Work, FORTUNE’s longtime research partner for the 100 Best Companies to Work For list. Ed also is co-author of the forthcoming book, “A Great Place to Work For All”.

 

---------------

© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which  they might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. 

This publication may contain forward-looking statements. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. Any forward-looking statements speak only as of the date they are made and no member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking statements.

Blog Listing Page