Corporate Culture And Social Responsibility: Should Investors Care? UBS Says 'Yes'

Investors may be overlooking the importance of internal corporate culture and social responsibility pledges, to financial returns, according to recent research by Swiss banking giant UBS AG (VTX:UBSN).

In a pair of research notes from Monday, UBS analysts argue that internal corporate culture and staff morale can impact effective sales and research strongly. They add that corporate social responsibility also apparently drives stronger financial returns, at least on certain occasions.

In the note entitled "Corporate culture: relevant to investors?," analysts wrote: “Evidence suggests company culture is an overlooked input for analysis. We believe company culture, although difficult to quantify, matters for value creation.”

UBS profiled 200 companies in 20 sectors, deriving employee satisfaction statistics from three online career websites and their survey data. These surveys take self-reported feedback from hundreds or thousands of current and former employees.

The analysts then divided company cultures into five broad types, including those emphasizing employee happiness, meritocracy and results, constant organizational change, alongside companies which underinvest in their workforce or are on the verge of corporate complacency.

Since 2008, shares at certain companies valuing employee happiness and meritocracy have risen 104.7 percent and 54.1 percent, respectively. But the shares of businesses cutting labor costs or experiencing internal upheavals fell 22.1 percent and 78.8 percent, respectively.

Companies cited as examples of making employee morale a priority include Apple Inc. (Nasdaq:AAPL), Goldman Sachs Group Inc (NYSE:GS) and Monsanto Company (NYSE:MON).

Companies known as meritocracies include beverage giant Anheuser Busch Inbev SA (EBR:ABI), while those facing internal reforms include Hewlett-Packard Company (NYSE:HPQ) and Royal Bank of Scotland Group PLC (LON:RBS).

There wasn’t a sharp difference in employee satisfaction across industries as diverse as health care, energy and retail, according to the 93-page analysis. The analysts warn, however, that a strong corporate culture can quickly become complacent, and that companies where employees are less happy, as with some results-driven businesses, can nonetheless produce great financial results.

Analysts drew a parallel between corporate culture and advertising and research and development costs, sometimes viewed as intangible spends but which are often important to long-term profits. They also cited academic work, which showed that the 100 best companies to work for in the United States, according to a Fortune rating, performed significantly better than industry benchmarks.

In a June 2013 report, Gallup also found that American workers are remarkably dissatisfied with their jobs, with only one-third of Americans engaged by their work. The report pointed to an engaged company culture which promotes well-being as one way to improve job satisfaction and prevent turnover.

But UBS also found that investors have no special reason to select companies with an environmental or social mission, if they primarily want financial returns on investments.

Even with an “explosion of research” into corporate social responsibility since 2006, conclusions on the topic are still murky, with areas ripe for further inquiry.

“From the perspective of financial performance, companies should either make CSR [corporate social responsibility] core to the business or not bother,” reads the second UBS research note.

Still, an emphasis on social objectives doesn’t necessarily hurt the bottom line, and can in fact enhance it, but usually only if social goals are taken as fundamental to the business model. “The thing not to do is to “dabble,” defined as engaging in a box-checking approach,” reads the note.

The UBS research deals mostly with ordinary investors investing in public companies. For private wealthy investors, who may turn to hedge funds or other investment vehicles instead, the trend seems different.

“For my investors, they’re more suspicious of companies that put environmentalism as a primary goal, or put these intangible soft goals as primary goals,” hedge fund manager Jonathan Hoenig told International Business Times.

“A lot of my investors have been burned by ethanol in the past, burned by trading carbon efficiency credits,” said Hoenig, whose relatively small Capitalistpig Asset Management fund manages about $19 million of assets.

Hoenig also acknowledged the impact a vibrant company culture can have on earnings, but said his private clients rarely look at corporate culture as a major factor in isolation, or as a factor more weighty than economic prospects.

Even though bad corporate governance invites litigation and high turnover, good corporate culture may simply not be relevant for these investors, he said.

“A lot of companies have great, fun, and exciting cultures, but without good leadership and profitability on the corporate level, that’s simply not going to last long,” he said. “I can’t see anyone evaluating company culture as the primary factor, above economic prospects.”