The Impact of Empowered Employees on Corporate Value

The corporate culture of the 100 best companies to work for offers the key to maximizing shareholder wealth.

2005 Volume 8 Issue 1

The global competitive environment is and will become more brutal for corporations this century. Most corporations, however, fail to recognize and empower their most important assets: employees. The hypothesis of this article is that those corporations that truly exhibit employee empowerment through emphasizing meaningful communication, willingness to serve, and common purpose will have statistically more favorable financial and/or investment results than corporations lacking employee empowerment. This hypothesis has been substantiated and the conclusion made clear for corporate executives: Empower employees or accept substandard financial results and possible elimination as a competitive force.

The Concept of Empowerment

Many individuals think of employee empowerment only in behavioral terms. Indeed, many think of it in terms of allowing a free-flowing, non-structured environment for employees. This is not the definition intended in this article. Rather, the concept is herein defined in terms of the culture of an organization. Chester I. Barnard, author of Functions of the Executive,[1] considered by many as one of the management classics, would be a logical reference point for this definition. His key points for a manager, as the leader of an organization, center on the importance of three key concepts: communication, willingness to serve, and common purpose. In essence Barnard maintains that the profitability of an organization centers on the effectiveness of management to implement a corporate culture that recognizes and facilitates the foregoing key words. This author believes, through a logical extension of Barnard’s thesis, that without such a corporate culture, the maximization of shareholder wealth–the key corporate goal in a capitalistic marketplace–cannot be achieved. In that case, the corporation most likely will become ineffective in the global competitive environment, and therefore the long-term corporate value will suffer.

Barnard’s words remain clearly valid. The term profitability has, of course, been changed to “maximizing corporate value.” However, the essence of Barnard’s clear managerial logic remains. It is through empowered employees that the goal is achieved. To accomplish the goal, it is essential that the corporate culture be robust and satisfied and led by leaders, not managers.

Barnard most likely would agree with the comments of Warren Bennis that “The difference between managers and leaders is fundamental. The manager administers; the leader innovates. The manager maintains; the leader develops. The manager relies on systems; the leader relies on people. The manager counts on control; the leader counts on trust. The manager does things right; the leader does the right thing.”[2]

Many other authors have addressed the complex relationship of managers and leaders. Slywotzky and Morrison in their book The Profit Zone note that profit today “…is the outcome of smart business design.” They go on to note that there are twenty-two models/patterns of profitability. They further state, “Even if profitability is allowed in an industry and the profit model is understood, there are still significant differences in performance, depending on the norms, expectations, and culture that have been created within the organization.”[3]

The psychology of profitability and the maximization of corporate value lie within the culture of the organization. This author suggests, as did Barnard, that through communication, willingness to serve, and common purpose, organizational culture can be maximized, as can wealth, as long as the culture has a solid business design.

This duality has likewise been expressed by Worley, Hitchin and Ross as a “strategic orientation” that can evolve in a corporation over time. “Strategic orientation is itself an integrated concept that proposes that a firm’s strategy cannot be divorced from its organization design; that is, strategy, structure, and process are an integrated whole.” They further argue that “The capacity to change a firm’s strategic orientation over and over again is a truly sustainable competitive advantage.”[4]

Others have also expressed the same basic concept. H. Thomas Johnson remarks that “A work force empowered to learn and innovate must be the backbone of a strategy to create flexibility by removing constraints.”[5] Karl Sveiby notes that “People are the only true agents in business. All assets and structures—whether tangible or intangible—are the result of human actions. All depend ultimately on people for their continued existence.”[6] Love sees the empowered employee as the key agent to long-term customer loyalty and long-term corporate profitability. Indeed, in his organization bonuses become dependent on customer service scores independent of corporate financial performance.[7]

All these statements must be again reflected in the context of their impacts on the key corporate goal in a capitalistic marketplace: maximization of shareholder value. Fulmer and Conger state that “Corporations that fail to hold their talented employees when competitors or other opportunities come courting are sure to be losers.”[8] As DeKuyer states, “Value, unless consistently maintained, nourished, and improved, erodes over time.”[9] Since individuals are the change agents, they must be consistently maintained, nourished, and improved through communication, common purpose, and willingness to serve.

Empowerment Impact on Corporate Value: The Hypothesis

One way to reassess and measure by proxy this hypothesis of the effectiveness of maximizing employee empowerment is through the process of examining financially successful organizations and their attitudes toward empowering employees. An alternative way is to examine organizations that truly exhibit employee empowerment and represent a satisfied worker culture. One can then observe such organizations’ profitability and valuation parameters. This second method is the course chosen for this paper. It is the hypothesis of this paper that those corporations that truly exhibit employee empowerment and a satisfied worker culture will have statistically more favorable financial and/or investment results than will corporations lacking such focus.

In the spring of 2004, this author had the opportunity to teach a seminar in Advanced Financial Issues at Pepperdine University’s Orange County Center. The author instructed students to examine companies that had appeared in a Fortune magazine article on “The 100 Best Companies to Work for in America.”[10] This list was developed from a pool of about 1000 companies, almost two-thirds of which had been disqualified for a variety of reasons as the article was being written. The final number of firms included was 304. Each of these companies received a computed score. Two-thirds of the final score was based on the results of an employee survey. The remaining one-third was based on the companies’ responses to a questionnaire. The Top 100 companies are based on this final scoring.[11] The names of the top forty of these companies and their industries can be found in Table I.

Each member of the class examined at least one company for evaluation on multiple financial statistics. Only public companies from the top 100 list that were also included in the S&P 1500 were analyzed. The S&P 1500 represents a broad and representative set of companies suitable for investment by fiduciaries. It was felt that by limiting the use of only these institutionally followed companies, we could observe active market statistics. This strategy resulted in forty companies for analysis. Finally, it should be noted that these forty companies represented, in our opinion, a “diversified randomly selected” portfolio. Hence, the results can be viewed within an investment portfolio context.

TABLE I: The Forty Best Companies to Work For
(in Alphabetical Order)

COMPANY SYMBOL/EXCHANGE
N=NYSE
O=NASDAQ
INDUSTRY
1. Adobe Systems ADBE/O Computers
2. Aflac AFL/N Insurance
3. American Express AXP/N Finance & Leasing
4. Amgen AMGN/O Drugs
5. Cisco Systems CSCO/O Computers
6. A. G. Edwards AGE/N Securities Brokerage
7. Fannie Mae FNM/N Finance & Leasing
8. Fed Ex FDX/N Airlines
9. First Tenn. National FTN/N Banks
10. General Mills GIS/N Packaged Food
11. Granite Construction GVA/N Construction & RE
12. Harley-Davidson HDI/N Auto. & Truck Mfg.
13. Hot Topic HOTT/O Specialty Retailers
14. Intel INTC/O Semiconductors
15. IBM IBM/N Computers
16. Intuit INTU/O Computers
17. Eli Lilly LLY/N Drugs
18. Marriott International MAR/N Hotel & Motel
19. MBNA Corp. KRB/N Banks
20. Medtronic MDT/N Medical Supplies & Equip.
21. Men’s Warehouse MW/N Specialty Retailers
22. Merck MRK/N Drugs
23. Microsoft MSFT/O Computers
24. Natl. Instruments NATL/O Electronics & Instruments
25. Network Appliance NTAP/O Computers
26. Nordstrom JWN/N Department Store
27. Paychex PAYX/O Computers
28. Procter & Gamble PG/N Soap & Household Prod.
29. Qualcomm QCOM/O Electronics & Instruments
30. Republic Bancorp. RBNC/O Banks
31. J. M. Smucker SJM/N Packaged Food
32. Starbucks SBUX/O Restaurants & Fast Food
33. Synovus Financial SNV/N Banks
34. Texas Instruments TXN/N Semiconductors
35. Timberland TBL/N Shoes
36. Valassis Comm. VCI/N Publishing
37. Valero Energy VLO/N Integrated Domestic Oil
38. Washington Mutual WM/N Savings & Loan
39. Whole Foods WFMI/O Food Stores
40. Xilinx XLNX/O Semiconductors

Sources of Financial Statistics Selected

The financial statistics chosen for evaluation were taken from two sources. The first is from Value Line, a well-known investment publication for individual investors.[12] The second is from Ford Equity Research of San Diego, which provides investment data to the institutional community.[13] The choice of the financial variables centered on their availability as well as their usefulness to investment advisors.

The Value Line data centered on three well-known statistics found in the lower right hand box on each company data sheet. These three statistics are: (1) Price Stability (VLPS); (2) Price Growth Persistence (VLGP); and (3) Earnings Predictability (VLEP). All three statistics are scored on the basis of 5 through 100 (in 5 percent increments) with 5 being the poorest and 100, the best. Price stability refers to the five-year standard deviation of weekly stock prices. Price Growth Persistence refers to the ability of the company on a year-by-year basis over the past ten years to advance in price above the Value Line 1700 Index. Earnings Predictability refers to the ability of the company to have consistent changes (positive or negative) in earnings.

Ford Equity Research develops a large investment database. A number of financial items were chosen for analysis. These included Ford Equity’s: (4) Beta; (5) Financial Quality; (6) Growth Persistence; (7) Earnings Variability; (8) Debt to Assets; (9) Normalized Profit Margin; (10) Normalized Return on Assets; (11) Normalized Return on Equity; and (12) Total Return for the past five years. Beta refers to the systematic market risk of a company, while the financial quality reflects Ford Equity’s own rating (1 to 9, with 1 being best) of the stand-alone risk of a company. The Growth Persistence is similar to Value Line‘s except that high and consistent return on equity has significant scoring impact. Earnings variability refers to the standard error/mean of the Ordinary Least Squares (OLS), or the linear regression of cumulative twelve months’ earnings over the past eight years. The smaller the number, the better the company can control its operations. Debt to Assets is taken from the balance sheet. Ford Equity has a unique way of measuring the standard profit margin, return on assets, and return on equity. Instead of using actual data, they often utilize normal data, or those financial results that should be expected. The best, but not totally the most accurate way to visualize these three aspects is to remember that the net profit number is the last regressed data point on the eight year OLS.

Two Created Variables

In addition, two other created variables were developed for this paper. The first is (13) Asset Economic Value Added (AEVA). The second is (14) Equity Economic Value (EEVA). AEVA is found by taking normalized return on assets, divided by the debt to asset ratio, minus the current AAA bond rate (6.00 percent at year-end 2003). EEVA is found by taking normalized return on equity, less 0.5 percent, times the quality rank (1 to 9, best to worst), less the current AAA bond rate (6.00 percent at year-end 2003). Data were taken from the EPIC-CD disk for year-end 2003. Both AEVA and EEVA attempt to determine whether the company is creating (positive value) or destroying (negative value) company wealth. Many investors, such as Warren Buffett, invest only in companies having a positive value regardless of market or intrinsic value. It should be noted that the use of Economic Valued Added and Market Value Added would have been more useful, but they were unavailable on the data sets.

Empowered Companies’ Empirical Financial Results

The results of the twelve financial variables from Value Line and Ford Equity can be found in Table 2 for both the 40 empowered companies and the Standard and Poor’s 1500 companies. The mean of each variable for the 40 companies and the S&P 1500 were calculated and then tested to see if the means were statistically significant.

TABLE 2
Financial Variables
The Forty Empowered Companies vs. S&P 1500 Companies

Item Empowered Mean S&P 1500 Mean Significant at
5% or 10% (13)
1. VLPS 56.38 52.50 NO/NO
2. VLGP 80.25 52.50 YES/YES
3. VLEP 72.88 52.50 YES/YES
4. Beta 0.99 0.90 NO/NO
5. Ford’s Quality 3.90 5.25 YES/YES
6. Ford’s GP 0.79 0.07 YES/YES
7. Ford’s EDV 21.00 106.00 NO/YES
8. Debt to Assets 0.53 0.56 NO/NO
9. Ford’s NPM 13.3 9.6 YES/YES
10. Ford’s NRA 8.6 6.1 YES/YES
11. Ford’s NRE 17.1 13.5 YES/YES
12. 5 YR Total Ret. 13.3 9.0 NO/YES
13. AEVA 19.02 12.11 NO/NO
14. EEVA 9.14 4.89 YES/YES

The results of the investigation are overwhelmingly in favor of the 40 empowered companies. The foregoing list of variables is representative of the many financial or investment variables that could be used. That only six of the fourteen means of the empowered companies failed to be statistically significant at the 5 percent level and that only four were not significant at the 10 percent level is quite meaningful.

Of the six means that did not meet the 5 percent test of significance, four of them center on the concept of risk. The empowered companies did not have a material mean difference in systematic or market risk (beta) or market total risk (VLPS). Furthermore, these companies did not have a material difference in earnings variability (EDV) and debt to assets (DAS), both of which are risk measurements as well.

The fact that the four risk means are not significant, but the four performance means are significant (VLGP, GP, NRE, and EEVA) indicates a powerful tradeoff for investors. Thus, for the same stated risk as the S&P 1500, among the 40 empowered companies there was no statistically significant difference for the betas, although some investors might consider .99 to be meaningfully higher than .90. Furthermore, Ford’s Quality rating indicates a favorable (less risky than the S&P 1500) financial total risk for the 40 empowered companies as well!

These findings have a clear implication for risk-averse investors, such as Warren Buffett, who rely on total risk rather than systematic risk as the risk measurement. They should buy diversified portfolios of empowered companies to achieve superior returns with less risk and an excess alpha. This is the true quest of all investors!

Conclusion

The evidence from “The 100 Best Companies to Work For” seems clear. Those companies in the analyzed sub-set of 40 empowered companies appear to maximize corporate wealth. Although we cannot precisely substantiate this claim, we believe that these companies have developed unique corporate cultures. Jay Barney has noted that “A firm’s culture can be a source of sustainable competitive advantage if that culture is valuable, rare, and imperfectly imitable.”[14] We would anticipate that most of these 40 cultures would share those three characteristics.

We view culture, therefore, not simply as another series of manipulable tools available to managers for the implementation of business strategies, but as an entity that can be a potential source of sustained superior financial performance. Hatch and Dyer suggest that corporations that empower employees with the ability to learn (and improve) faster than their competitors do may enjoy the only truly sustainable advantage.[15] If one accepts the proposition that the global competitive environment of this new century will be brutal, corporate executives have no choice: Executives must adopt a policy of empowerment of employees through meaningful communication, willingness to serve, and common purpose, or witness the destruction of the corporation’s market wealth.

*Special thanks to William H. Bleuel, Ph.D. for the statistical tests.


[1] Chester I. Barnard, Functions of the Executive (Cambridge, Mass.: Harvard University Press 1938.)

[2] Warren Bennis, as quoted in Fortune Magazine, 18 January, 1988: 173. (Obtained from a secondary source.)

[3] Adrian Slywotzky and David J. Morrison, The Profit Zone (New York: Three Rivers Press, 2001): 48.

[4] Christopher G. Worley, David E. Hitchin, and Walter L. Ross, Integrated Strategic Change (Reading, Massachusetts: Addison-Wesley Publishing Company, 1996): 2.

[5] H. Thomas Johnson, Relevance Regained (New York: The Free Press, 1992): 95.

[6] Karl Erik Sveiby, The New Organizational Wealth (San Francisco: Berrett-Koehler Publishers, Inc., 1997): 8.

[7] Gary Love, Diamonds in the Data Mine (Harvard Business Review, May, 2003): 109-113.

[8] Robert M. Fulmer and Jay A. Conger, Growing Your Company’s Leaders (New York: Amacom, 2004): 8.

[9] Cornelis A. Kluyver, Strategic Thinking (Upper Saddle River, New Jersey: Prentice-Hall, 2003): 5.

[10] Robert Levering and Milton Moskowitz, “The 100 Best Companies to Work For,” Fortune Magazine, 12 January, 2003: 56-79.

[11] Email from Cynthia Judkins, Best Companies Project, to Rachel Lenington (student), 3 March, 2004.

[12] Value Line Investment Survey (New York: Value Line Publishing, Inc., 220 East 42nd Street, New York, New York.)

[13] Ford Equity Research EPIC-CD data diskette for 31 December, 2003, (San Diego, CA.: Ford Equity Research, 11722 Sorrento Valley Road, Suite I, San Diego, CA.)

[14] Jay B. Barney, “Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?,” Academy of Management Review, 11(3) 1986: 663.

[15] Nile W. Hatch and Jeffrey H. Dyer, “Human Capital and Learning as Source of Sustainable Competitive Advantage,” Strategic Management Journal, 25 (2005): 1155-1178.

About the Author(s)

Darrol J. Stanley, DBA, is a professor of finance at the Graziadio School of Business and Management. He is well-known as a financial consultant with special emphasis on valuing corporations for a variety of purposes. He has also rendered fairness opinions on many financial transactions, and he has been engaged by corporations to develop strategies to enhance their value. He has served as head of corporate finance, research, and trading of four NYSE member firms. He likewise has been the principal of an SEC-registered investment advisor. He has completed global assignments as well as having served as Chief Appraiser of International Valuations/Standard & Poor's in Europe, Central Europe, and Russia.