National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


Focusing on Companies with Good Labor Practices is a Sound Investment Strategy

By: Marina Severinovsky, Schroders

To further our understanding of the value of sustainable human capital management, Schroders has conducted detailed research into human capital management in collaboration with CalPERS and the Oxford Rethinking Performance Initiative at Said Business School, University of Oxford. Our research verifies that firms with good human capital management practices perform better financially.

This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024.

Common sense suggests that companies who treat their employees well perform better. They experience lower turnover and have a highly motivated, and therefore more productive, staff. But we looked to quantify those benefits by undertaking research with the California Public Employees Retirement System (CalPERS) and the University of Oxford's Said Business School.

To gauge the impact of good labor practices, we developed a set of key metrics, including the Human Capital Return on Investment (HCROI) that considers the returns companies realize from the investment they make in employees through salaries and benefit packages.

Our research shows that human capital returns are positively correlated with forward excess returns over multiple time horizons and across the majority of sectors. Clearly, offering high salaries is not the only way to manage human capital well. In fact, companies on the high end for compensation often underperform, if they do not excel at the other aspects of human capital management.

While understanding the effects of different human capital management systems requires a mix of quantitative and qualitative assessments, we have found that having a strong culture and inclusive workplace has a high or very high material impact on company performance in sectors like healthcare, information technology, consumer staples, and consumer discretionary. Investing in talent and learning systems has a significant impact on companies in the energy sector, as well as those in the consumer staples and healthcare sectors.

Our research confirms other studies that have also demonstrated the importance of effective human capital management. For example, a study by Barclays showed a high correlation between a company's safety records and its profit margins. Another study by McKinsey found that companies that rank in the top quartile for gender diversity among executives were 25% more likely to have above-average profitability than those that rank in the fourth quartile for the diversity of their leaders.

For investors, there are a variety of metrics that can be assessed to determine how effectively companies manage their human capital. These range from firms' health and safety records to the diversity of their workforces and the existence of any gender wage gaps.

While each of these considerations is critical on its own, we have also found the companies that have the best human capital management practices take a holistic approach and recognize that all of these factors are interrelated and work together to create an environment of trust that enables employees to do their best and make significant contributions to the success of companies. Clearly, there is also a material benefit for investors to focus on the companies with these strong labor practices.

About the Author
Marina Severinovsky is the Head of Sustainability, North America, at Schroders. She leads the sustainability and environmental, social, and governance (ESG) integration for Schroders investments in North America. Marina collaborates with senior managers on market strategy, client communications, product development, sales, and investor management.

Previously, Marina served as the Investment Director for North America for the Quantitative Equity Products (QEP) team from 2020. In this role, she was responsible for communicating QEP's investment policy and strategy with clients, as well as business management in the Americas.

Marina joined Schroders in 2010 and has 18 years of professional experience, including economic analysis, research, financial modeling, product development, strategy, and client relationship management. She is conversationally fluent in Russian and is based in New York.

Disclosures: All investments involve risk, including the loss of principal. Past performance provides no guarantee of future results and may not be repeated. The views shared are those of the author and may not reflect the views of Schroders Plc or any of its affiliates. Information herein has been obtained from sources we believe to be reliable but Schroders Plc does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. Any mention of industries or sectors is for informational purposes only and should be interpreted as a recommendation to invest or divest in any company or adopt a particular investment strategy. Schroder Investment Management North America Inc, registered as an investment adviser with the SEC, CRD Number 105820.


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