Businesses don’t care about their employees. Discuss
If I had a dollar for every time I heard a company executive say their employees are their biggest assets, I’d be a millionaire. Yet, somehow this rhetoric about employees as assets for a business always seems to be just that. Rhetoric without much conviction.
To be clear, employees tend to be the biggest assets of a firm, particularly in knowledge industries where the quality of products and services is driven by the quality of people who develop, maintain, and sell them. If a company has a great product, customers will come and buy it as Apple has proven many times under Steve Jobs. If a company has great service, customers will prefer its service rather than competitors even if this service comes at a higher price, as Singapore Airlines demonstrates daily.
To be provocative, one could even say that if you have a company full of great, high-quality employees, you don’t have to worry about your customers. They will come to you all on their own and stay with you for a long time.
Yet, in the upcoming earnings season, guess what company executives will talk about in earnings calls more frequently, their customers or their employees? You guessed it. Executives talk about customers far more often than about ‘their biggest assets’. About six to ten times more often, to be precise.
The chart below shows an analysis of almost 6,000 earnings call transcripts of US companies between 2010 and 2021. Especially the larger companies in the S&P 500 seem to hardly remember their employees exist since they seem to go on about their customers far more often than smaller businesses.
Frequency of customer mentions vs. employee mentions in earnings calls
Source: Bhatia and Meier (2024)
One may say that this emphasis on customers over employees is to be expected since customers are the immediate driving force of revenues and profits in the coming quarters. But we live in the age of machine learning and AI. Machine learning tools can analyse the context and the sentiment with which executives discuss customers and employees.
So, let’s have a look at the charts below which show the inverse ratio of employee mentions vs. customer mentions based on the sentiment of the discussion.
On the left-hand side, the ratio shows the situations in which customers and employees are discussed as a source of growth, etc. In other words, these are optimistic, and strategic considerations. In this context, employees are typically mentioned 10% less than customers.
Now look at the right-hand side which are discussions with a prevention focus, i.e. discussions that focus on risks and potential losses. Here, employees are mentioned more often than customers, in particular during the pandemic years 2020 and 2021.
Promotion and prevention focus of employee and customer discussion
Source: Bhatia and Meier (2024)
The analysis of earnings calls shows clearly that executives do not typically talk about employees as a source of growth or as an asset for the business. They typically talk about employees as a risk that needs to be mitigated. Indeed, further analysis shows that executives tend to talk more about their employees when the job market is tight, and they have a hard time finding qualified candidates for jobs. When the job market is normal or in a recession, employers could not care less about their employees as an asset to the firm. They just assume that when a good employee leaves, they will hire another qualified one who is good enough.
Yet, when it comes to long-term success for a business, its employees are at least as important as its customers if not more so. So, to executives, I say stop bs-ing about how employees are your biggest assets when you do nothing to support this. Actions speak louder than words.
And to my fellow investors, I say put greater emphasis on how businesses talk about their employees and how they treat them. As the example of Apple and many other companies show, great people make great businesses, but there is no such thing as a great customer. If you only invest in companies that treat their employees well and look at them as the key drivers of business success they are, I guess you will end up with an outperforming portfolio.
I wonder if there is an investible ranking out there of companies that treat their employees well?
By the way, I am sure there are a lot of different definitions out there of what constitutes "good treatment". The free coke and Tischfussball of a startup is one thing, but I'd rather stress the concept of enabling employees to do their job well, with as much at-work education as needed, and with as little bureaucracy as possible.
Ex CEO of Southwest airlines Herb Kelleher was considered a heretic for saying at Southwest customers come second (employees come first). You only need to look at global engagement figures that finds less that 20% of employees are engaged, the rest either or not engaged or actively disengaged to know most publicly traded companies treat their employees as factors of production. You use Apple as a counter example but by all accounts Jobs was a tyrant and an aberrant boss to work for. I’d suggest humane treatment of employees comes from a leadership culture that is greater than any one CEO - we know how transient they are in public ally traded companies. Can publicly traded companies (vs the vast majority of other types of organisms) truly put employees first due to their structural impediments to do so of the focus on quarterly profits and a small cabal of shareholders? I’d look at other organisational forms for that, e.g. family run businesses like the German Mittelstand ‘Hidden champions’ that are the heart & engine of the German export juggernaut.