Take This Job and Love It

I ONCE HELD A convenience-store job for 45 minutes before deciding the work was too depressing. Years later I saw a television interview with Bill, a breedery worker whose job it was to collect reproductive contributions from 150 male turkeys a day. The thing is, he seemed genuinely satisfied with his work. And yet ringing up Twinkies was more than I could bear. I don't know. Maybe Bill just had one hell of a 401(k).

For more than 25 years, the Great Place to Work Institute has been trying to figure out why some companies have happier employees than others. Trust, it has concluded, plays a key role. Managers must trust employees enough to keep them updated on their plans and to give them a say. Workers must trust in the company's mission and believe they'll be rewarded for their efforts. Pride and camaraderie should follow. If that sounds too touchy-feely for a stock column, don't worry. The Institute has developed a way to score companies on employee satisfaction, and new research suggests that high scorers produce double the broad market's returns.

The notion that happy workers produce better stock returns might sound like a no-duh conclusion. But for most of the past century, management theory taught just the opposite. The most efficient companies were assumed to be those that extracted maximum effort from workers for minimal pay. As recently as 1989, one study reaffirmed the long-held belief that wages and profits are a zero-sum game; announcements of pay increases were found to reduce company market value dollar for dollar. Viewed that way, excessive employee happiness might be considered a sign that pay is being wasted and shareholders are being shortchanged.

Of course, pay is not necessarily the same as worker satisfaction. America's shift from a manufacturing economy to a service-and-information one has brought with it a relative drawdown of physical capital and the rise of human-resources departments. Finding and keeping good workers, the new key to competitive advantage, takes more than pay. It takes benefits, some of which, like insurance, are merely other forms of pay and some of which, like "flextime" plans, are not. It helps if a company can create self-esteem and a socially friendly culture.

That calls for careful forethought. Hackneyed efforts like Hawaiian-shirt day will make a worker like me start carrying a flask of gin and stealing petty cash. But other options abound: Acuity, a Wisconsin property insurer, ensures that each employee has lunch and an informal chat with top executives once a year. General Mills provides on-site day care and encourages workers to bring their children to the cafeteria for lunch. Since there's no separate executive dining room, the bosses interact with workers and their kids. Wawa, a convenience-store chain based in Pennsylvania, has its own "university" through which workers can earn degrees from local colleges.

Early attempts to score companies on worker satisfaction focused mainly on observable measures. Studies showed little link between the scores and company returns. But those scores didn't differentiate between companies that truly create happy workplaces and those that, say, add a minority to the board and offer a bare-bones health plan just to improve their scores. Since 1984 the Great Place to Work Institute has compiled a list called "100 Best Companies to Work for." Its process relies one-third on observable traits and two-thirds on worker surveys. Great Place asks 250 workers at each company 57 questions that are designed to judge attitudes toward management, fairness, camaraderie and more. You can find the current company list at www.greatplacetowork.com and screen it for things like company size and whether there are listed shares. Two studies, one in 1998 and another in 2006, found that Best Companies produce better financial results than other companies, but the direction of cause and effect was unclear. Do happy workers produce more prosperity, or do prosperous companies make workers happy?

Alex Edmans, a former investment banker for Morgan Stanley who now teaches fast-track finance courses to Wharton MBA students, has tackled that question in a new study. His interest is in how the stock market values intangibles — like customer and worker satisfaction — that don't show up on a company's financial statements. Edmans simulated buying shares of each year's publicly traded Best Companies. Yearly returns totaled 14 percent, versus 6 percent for the broad market. Results were strong even after controlling for other factors that influence returns, like company size and valuation metrics. Importantly, Edmans created each year's portfolio in February. Since 1998, Fortune magazine has published the Best Companies list each January; the one-month delay ensures the returns aren't due just to publicity. The results support Edmans's hunch that investors tend to ignore valuable company assets that don't lend themselves neatly to financial analysis.

Investors should be able to put that finding to profitable use. I compiled the accompanying list of stocks by pruning this year's U.S. Best Companies (which includes some foreign firms with U.S. work sites) to public companies with low price/earnings ratios and high returns on equity.

A decade ago Herman Miller's (MLHR) $1,000 Aeron chair was the very symbol of companies that coddle workers. More recently, Herman Miller has freshened its offerings and kept strict focus on efficiency. As a result, while this year has been modest for office-furniture sales, Herman Miller's revenue is expected to inch higher and its per-share profit to jump 26 percent. Like many big drugmakers, London's AstraZeneca (AZN) has hit a pipeline lull. Some experts say chemistry has neared the limit of medically useful combinations of elements, while biotechnology, the next fertile field for drugmakers, isn't yet yielding blockbuster sales. That leaves aging branded drugs prey to generic competitors. AstraZeneca has cut costs and last year spent $15 billion to buy MedImmune, a biotech firm with $1 billion in sales. AstraZeneca shares seem discounted to the industry by a quarter and pay a 4.3 percent dividend.

A weak housing market and high oil prices have sent shares of paint seller Sherwin-Williams (SHW) down 23 percent in a year. By my view of the historical relationship between house prices and annual rents (see an April 2007 essay titled "Renting Makes More Financial Sense Than Homeownership" for details), houses are still expensive. But Sherwin makes money from home touch-ups in addition to new construction, and the stock at least looks cheap at 12 times this year's expected earnings. Microsoft (MSFT) was recently snubbed in its $47 billion offer for Yahoo. Shareholders ought to hope it stays snubbed. The stock in recent years has done best when management spent liberally on dividends and stock repurchases instead of hoarding cash and chasing pricey acquisitions.

Don't be fooled by the 10.9 percent surge in same-store sales that mall anchor Nordstrom (JWN) managed to produce in May. It shifted a big sales event ahead a few weeks, so early summer numbers could look deplorable. For the full year, sales and profits are seen falling by a whisker, but management has beaten Wall Street's forecasts in each of the past four quarters, largely through inventory management and expense control. Finally, Marriott International (MAR) shares have lost a third of their value in a year. With Americans having lost an estimated $1.7 trillion in net worth during the first quarter, the travel industry right now shows more worrisome signs than a hotel comforter under a black-light investigation. But Marriott is making good money overseas and so is forecast to eke out a few percentage points of profit growth this year, before returning to brisk growth in 2009.