What’s It Worth to Treat Both Customers and Employees Well? Research Says: $1.1 Billion

Lance A. Bettencourt
AMA Scholarly Insights
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Treat Both Customers and Employees Well
Key Takeaways

What? Investors have incomplete information so they rely on signals from the activities of a company to infer what it values.

So what? Research shows that market valuation is higher for companies that have notable customer- or employee-directed achievements, but this is especially true when both types of achievements are simultaneously present.

Now what? Companies should consider what signals they are sending to the market about the value they place on customers and employees. What’s more, they should coordinate achievements to have maximum impact, and avoid lapses with both groups in a given time period.

​When people speak about their love for companies like Southwest Airlines and Chick-fil-A, it often comes with praise for their achievements both in the realm of customers and employees. Of course, achievements with these two groups need not be connected. Over the past several years, for example, Wal-Mart has been praised for leading a campaign to encourage use of long-life light bulbs, while also facing allegations of gender discrimination and unsafe working conditions. Does it matter?

A paper in the February 2016 issue of Journal of Marketing Research, “Cross-Validation of Customer and Employee Signals and Firm Valuation,” shows that it does indeed matter. Research reported in the paper demonstrates that achievements with customers have a stronger impact on stock market valuation when the firm also has achievements with employees. And lapses with one group also have a bigger negative impact when paired with lapses with the other group.


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In fact, the research shows that the long-term market valuation of companies that experience publicly-known achievements with both customers and employees is 11% higher than the valuation of firms with no achievements or firms with achievements with one group but not the other. As the authors note, this percentage difference “translates into $1.1 billion, based on an average market cap of $10 billion for the S&P 2000” (p. 73).

How was the research done? And what is an ‘achievement’ anyhow?

To test their expectation that achievements (lapses) directed at customers and employees have a bigger impact on market valuation when they are both present, the researchers gathered data on 4,643 firms from the Russell 3000 Index over a 17-year time-frame (1994-2010). From Compustat, the researchers gathered financial data and other descriptive information on each company. From the institutional investor research firm Kinder, Lydenberg, and Domini (KLD), the research team obtained information on employee- and customer-related achievements and lapses.

KLD tracks information about each company from a variety of sources, including a global network of more than 14,000 global news sources, quarterly and annual company reports, government agencies and nongovernmental organizations, and direct communication with company officers. From these sources, they annually catalog employee- and customer-related achievements and lapses for each company.

  • Customer achievements fall into four areas: Quality, R&D/Innovation, Benefits to Economically Disadvantaged, and Other Achievements

  • Customer lapses fall into four areas: Product Safety, Marketing/Contracting Concern or Controversy, Antitrust, and Other Lapses

  • Employee achievements fall into six areas: Union Relations, Cash Profit Sharing, Employee Involvement, Retirement Benefits Strength, Health and Safety Strength, and Other Achievements

  • Employee lapses fall into five areas: Union Relations, Health and Safety Concern, Workforce Reductions, Retirement Benefits Concern, and Other Lapses

Using the KLD scoring for achievements and lapses as independent variables and data from Compustat to create a market valuation dependent variable, the researchers ran a series of analytical models to test their expectation. The analyses revealed that the effect of customer achievements (lapses) on market valuation is more positive (negative) when employee achievements (lapses) are also present. Further analysis demonstrated that this pattern of results is true for firms that operate in a single business segment (such as 1-800-Flowers), but not true for firms that operate in multiple business segments (such as GE which has healthcare, media, etc.).

Why does it matter?

Investors do the best they can with the information available to them. But they are always faced with partial data as outsiders to a company. As such, they must make inferences about company priorities and value based on observable characteristics and activities. Two sets of these activities of critical importance to investors are employee- and customer-directed activities.

However, as outsiders, investors have more confidence in observable activities when they are consistent with other things that can be observed about the firm. When a company has achievements directed at customers, but not employees, this is inconsistent and therefore difficult to interpret. In contrast, when a company has achievements directed at both customers and employees, investors take this as a signal that the firm takes these relationships seriously. This is especially true because of the cost and difficulty of simultaneously achieving excellence with both customers and employees.

For companies, the research shows that the market is watching how customers and employees are treated, not only the immediate effect of these activities on sales and profits.

In addition, this research highlights the importance of coordinating significant achievements directed at customers and employees. In isolation, the company may not see the return envisioned.

More broadly, the research reveals the importance of managing signals that the company sends to the market about its priorities and values. In particular, the market can be expected to react to actions the company takes that are costly or difficult to achieve because these are more likely to signal true priorities. The market is also more likely to respond to activities that are credible because they align with other actions and investments the company is making or has made.


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Author Bio:

 
Lance A. Bettencourt
Lance A. Bettencourt is Associate Professor of Professional Practice in Marketing at the Neeley School of Business at Texas Christian University, and author of Service Innovation: How to Go from Customer Needs to Breakthrough Services.
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