Chinese workers prepare an export order at a clothing factory in Suzhou
Workers at a clothing factory in China. Consultant Amin Rajan says investors are paying more attention to the wider social aspects of company behaviour © Reuters

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The claim that a company’s best assets are its people has now been built into investment strategies powering three exchange traded funds that seek to profit from the undervaluation of an employee-friendly corporate culture.

Dan Ariely, a professor of psychology and behavioural economics at Duke University who helped to build the strategies used by Harbor Capital for its ETFs, argues that companies that “do the right thing” in creating a culture where employees feel genuinely valued and motivated enjoy an improvement in their financial performance and share price.

“Happy and motivated employees can generate better outcomes for companies and investors,” said Ariely.

The theory also holds that scandals — such as that currently engulfing the CBI, a vocal advocate for best practice standards in the workplace now embroiled in allegations of a toxic workplace culture — destroy value.

Workers’ views of their companies are scored across seven categories to create a Human Capital rating by Irrational Capital, the investment research boutique co-founded by Ariely and David van Adelsberg, a former fund management executive.

The data to construct each rating is drawn from a proprietary database and public websites, such as Glassdoor, where employees review their former employers. No financial data is used in the ratings.

Ariely said the strongest share price signals were derived from harder-to-measure metrics such as employees’ perceptions of autonomy, fairness, trust, alignment of interests and psychological safety. More easily measured metrics such as job titles and benefits provide weaker performance signals.

Amin Rajan, chief executive of the consultancy Create Research, said investors were paying more attention to the wider social aspects of company behaviour as the investment appeal of a business could be damaged by the spread of less secure employee conditions. 

“The gig economy, which has no paid sick leave, healthcare or retirement benefits, shows how socially undesirable job practices have acquired a cloak of legitimacy and undermined the long-held social contract between employers and employees,” said Rajan.

Kristof Gleich, Harbor Capital’s chief investment officer, said current accounting rules did not always capture the value of a company’s investment in its brand, research and development, or its people.

“It has become a cliché for business leaders to say that ‘our people are our best asset’. But it is also true as we live in a knowledge economy,” said Gleich, who previously worked in manager selection teams at Goldman Sachs and JPMorgan.

The Harbor Corporate Culture ETF (HAPI), is a modified market capitalisation weighted portfolio of about 150 US companies which has delivered a 19 per cent total return since it was launched in October 2022. HAPI has accumulated $240mn in assets which are almost entirely held by the $143bn State of Wisconsin Investment Board that oversees the investment assets of the public pension plans in the midwestern state.

Harbor Capital also offers a Corporate Culture Leaders ETF (HAPY), which tracks an equally weighted index of 70 to 100 US companies with a market value of at least $1bn that have the best Human Capital scores. It has gathered just $10mn in assets and returned a slightly disappointing -8.5 per cent since it was launched in February 2022, against -4.4 per cent over the same period for SPY, the largest ETF tracking the S&P 500.

The third Harbor Capital ETF based on Irrational Capital’s work was launched just last month and has $91mn in assets. It tracks a market capitalisation weighted index of about 200 US smaller companies and is known as HAPS

“New investment factors don’t come along very often. Human capital felt like the missing piece of a jigsaw,” said Gleich.

Despite the divergent returns from the ETFs in Harbor Capital’s corporate culture offering, JPMorgan’s quantitative analysts have also identified Irrational Capital’s work as a potential source of alpha — market beating returns.

“The Human Capital Factor exhibits noteworthy long-term outperformance versus the [US equity] market,” wrote Ayub Hanif, an analyst at JPMorgan, in a research note in November.

Ariely said Irrational Capital was working with the bank to develop a corporate culture strategy tailored to fit the needs of insurance companies.

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However, Greg Davies, head of behavioural finance at the consultancy Oxford Risk, a consultancy, said that while it made sense for investors to understand corporate culture to help them identify well run companies, this was no guarantee of future share price outperformance.

“Companies with a strong corporate culture should actually present less risk for investors,” said Davies. However, he also cautioned that strategies built on back-tested data did not always meet investors’ expectations after they started trading. 

“It is a leap to assume that companies with a strong corporate culture will continue to outperform once that pricing anomaly has been identified. We have seen other examples where arbitrage opportunities disappear rapidly after attracting a lot of new money,” he said.

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