There is a growing body of evidence that supports the concept that a healthy workforce provides a competitive business advantage. Unhealthy employees typically spend more on healthcare, a direct cost for most large and mid-sized employers. Even more costly are the losses in productivity—an estimated $2 to $3 additional dollars for each dollar spent on direct healthcare costs.1 Moreover, companies that focus on health and safety for their workforce may create a culture that supports a healthy workforce and increases the percentage of employees engaged and committed to the organization's success.2 Additionally, these companies may become “employers of choice,” allowing them to attract and retain top-performing talent.
Nearly three decades of research suggest the importance of corporate culture and financial performance. Early work focused on the financial performance of companies that demonstrated they valued employees, customers, and owners3 and the performance of companies that were well-thought of by their employees, vendor partners, customers, investors, and society.4 More recent studies have found the superior stock performance by organizations that achieve a culture of health, as measured by receipt of various health, safety, and well-being awards such as the American College of Occupational and Environmental Medicine's (ACOEM) Corporate Health Achievement Award (CHAA),5 the C. Everett Koop (Koop) National Health Award,6 the Gallup Great Workplace Award,7 or being recognized as a high-scoring Health Enhancement Resource Organization (HERO) company.2 It is noteworthy that the results from numerous studies uniformly show improved stock performance.
For example, a portfolio of companies who had received the CHAA because of their robust health, safety, and environmental programs outperformed the Standard &Poor's 500 (S&P 500) over 13 years (1999 to 2012) and showed a cumulative return for the CHAA recipients of 78.72% versus –0.77% for the S&P 500.5 Research that followed found that a simulated portfolio of publicly traded companies receiving high scores on the HERO corporate health and wellness self-assessment scorecard demonstrated an appreciation of 235% compared with the S&P 500's 159% over a 6-year simulation period.2 Similarly, over 14 years (2000 to 2014), a portfolio of the 26 publicly traded companies who had received the Koop award outperformed the S&P 500 Index by 2.35 to 1.00.6 Publicly traded companies that received the Gallup Great Workplace Award experienced a 115% growth in earnings per share (EPS), compared with the 27% EPS seen in their competitors over the same period.7 The positive relationship between award receipt and stock performance makes sense. These companies likely create an environment that reinforces conscious and unconscious health and safety choices and fosters discretionary effort.
Many studies have shown that a healthy workforce is more productive and incurs fewer direct and indirect health costs.8–11 Healthcare represents a high cost to companies, averaging $14,561 in employer-paid costs per employee in 2019,12 with the average premium for family coverage increasing 54% over the last 10 years, much higher than either wage or inflation increases in the previous decade. Since most companies of more than 1000 workers self-insure,13 reducing health costs can directly impact funding for additional capital investments and the higher return to shareholders.
Additionally, productivity losses due to illness cost US employers $530 billion annually.14 Prior research has shown that for every dollar saved in direct health care costs, employers receive an estimated $2.30 in improved performance and productivity.15,16 This is bolstered by research that shows companies that score high on the culture of health assessment scores (CHAS) to quantify “cultures of health” tend to have lower health care cost trends without the need to reduce benefits or shift more costs to employees.17
Warren Buffet has called health care cost the “real corporate tax” because of its escalation over the last many years.18 A recent study shows that companies who engage in validated ways to support their workforce's health, safety, and well-being tend to see a reduction in health care cost trends.17 Creating a culture of health is particularly important in a business environment where healthcare costs are often considered a runaway cost, rising at a rate two to three times higher than general inflation.
In sum, the evidence clearly points to the correlation of companies that invest in a culture of health, safety, and well-being having a competitive advantage. It stands to reason then that investors who can identify and score those companies should have an investment advantage.
With this in mind, we set out to test the hypothesis that a real-world stock investment fund of publicly traded companies selected on evidence demonstrating their pursuit of a culture of health, safety, and well-being would outperform the market over a 10-year period. Additionally, we hope to clearly demonstrate the financial benefits for employer leadership, fund managers, and investors in developing ways to assess and invest in companies distinguished in their commitment to maintaining and improving their workforce's health, safety, and well-being.
Building a Fund That Focuses on a Culture of Health
In today's diverse investment fund market, no fund presently focuses primarily on companies that demonstrate a culture of health, safety, and well-being for their workforce. Health impacts all human performance, but other funds and indices seem to ignore this critical factor. Most employers state that their workforce is their greatest asset. Those who invest in their physical, emotional, financial, and social well-being should provide a better return on investment. Large business consulting practices such as McKinsey and Company have even developed products such as the Organizational Health Index (OHI), designed to help companies improve shareholder return by making measurable improvements in well-being.19 An appreciation of the years of research showing the connection between health and organizational financial performance, and an understanding of how companies that create and sustain a culture of health are set apart from those who do not lead to the development of an investment portfolio, called the Health Advantage Appreciation Fund (HAAF). The HAAF set out to invest in the stock of publicly traded companies demonstrating a culture of health. The HAAF approach differs from funds such as the Parnassus Endeavor FundSM (MUTF: PARWX) and the Calvert US Large-Cap Core Responsible Index (MUTF: CSXAX). These funds focus primarily on great places to work at or social responsibility. The Parnassus Endeavor Fund focuses on companies recognized as good employers to work for but does not look to health specifically.20
The concept behind the development of the HAAF portfolio derives from the body of work demonstrating that companies that nurture a culture of health, as measured by receipt of highly coveted awards for workplace health and safety, have higher stock performance than the S&P 500.2,5,6,7 The HAAF management team developed a methodology by studying benchmark companies who have accomplished a culture of health as well as calling upon learnings from the HealthNEXT (Newton Square, Pennsylvania) methodology which identified 218 elements in 10 categories that can contribute to a culture of health and are shown to correlate with health cost trend.17 These “Best practice” categories include:
- Leadership support and management alignment in promoting a culture of health.
- Marketing and communications to promote the value of health and healthy lifestyles.
- Investments in warehousing and integrating multiple sources of data related to health and productivity.
- Establishing a multi-year strategic health and wellness plan.
- A work environment promoting health such as a smoke-free campus.
- On-site health activities such as having a workplace health clinic.
- Health and wellness activities and programs directed toward prevalent risks and illnesses.
- Incentives and benefit design that promote healthy behaviors.
- Promoting and measuring engagement and navigation of health, safety, and well-being programs.
- Health-related vendor management and integration.
Each company considered for the fund underwent a rigorous scoring process that looks at corporate performance metrics focusing on key indicators of a commitment to a culture of health available in the public domain currently and over the previous 3 to 5 years. These metrics include investments such as a workplace health clinic, having a corporate health officer at the senior leadership level, the company demonstrating leadership via presentations at health, wellness, and safety conferences, and other activities focused on the health, safety, and well-being of their workforce that served as proxies for companies that are committed to nurturing their workforce. Additionally, the scoring includes companies who had received prestigious health awards such as the CHAA from ACOEM21 or the Koop Award from the Health Project.22
Beyond the firm belief in the concept that a commitment to a culture of health can lead to more robust returns, the fund uses a systematic, continuous review of information available in the public domain to identify best practice employers building cultures of health. Sources include the company's annual and quarterly reports and SEC filings, company websites, medical literature, business news, other media, conference attendees and presentations, key presentations such as webinars and keynotes by company leadership, and awards, and the presence of comprehensive workplace health centers.
Due to the level of investment needed to implement many of the metrics, plus the sophisticated business operations and leadership necessary to earn benchmark status, the portfolio primarily consists of large-cap S&P 500 companies (Fig. 1), a stock market index that measures stock performance of 500 large companies listed on the US stock exchange, and frequently used as a benchmark for stock performance. Smaller and international companies are included to a much lesser extent when public domain information reveals their outstanding efforts. However, the resulting portfolio demonstrated significant diversification by sector with health care, consumer staples, information technology, consumer discretionary, industrials, materials, financials, telecommunication services, utilities, energy, and real estate represented (Fig. 2). The variety of stocks in the portfolio diversifies the holdings and ensures that a single holding or sector's performance does not determine fund performance.
A few of the fund companies were acquired or acquired another company outside the portfolio or were part of corporate mergers during the study period. Mergers and acquisitions can change the corporate culture. The time leading up to and following the merger or acquisition completion often increases stock volatility.23 Investment decisions were made by considering whether pursuing a culture of health, safety, and well-being was likely to be continued with focused efforts post-transaction.
The portfolio's investments were based 75% on the proprietary score of their culture of health and 25% based upon the “street's” assessment of the potential for their stock's appreciation. By considering outside investment house stock assessments, the fund considers the company's business potential and recognizes that a culture of health alone cannot dictate a quality investment. The fund manager limited the number of individual stocks in the portfolio to no more than 40 companies and the fund was re-balanced every 6 months. The methodology provided assurances that the fund's growth would not be unduly influenced by a single high performing enterprise but rather that the fund's appreciation would be based on the collective performance of the “culture of health” companies.
Companies no longer publicly traded were removed from the fund when their trading ceased, and monies accumulated by these investments, as well as dividend payments, were re-distributed during the next semi-annual re-balancing. The dividends were not immediately reinvested, which would have enhanced appreciation.
Using reports generated by a well-known financial institution's private banking and investment group, fund performance was tracked for a decade from the fund's initiation on January 1, 2009, through December 31, 2018. The annual and cumulative time-weighted return of the fund performance was compared relative to the S&P 500. We looked at the total return (TR), the actual rate of return of the portfolio compared with the TR for S&P 500 over the evaluation period, including interest, capital gains, dividends, and other distributions realized during the evaluation period. Total return determines an investment's actual growth over time. While the S&P 500 TR reinvests interest, capital gains, dividends, and other distributions immediately, the HAAF portfolio accumulated interest, capital gains, dividends, and other distributions and reinvested them semi-annually. Along with re-balancing, this further reduced the potential untoward influence of a single stock and allows for a better measure of the collective performance of the distinguished culture of health enterprises.
Over the 10-year follow-up period, portfolio companies changed, as noted in the previous section. However, roughly half of the companies were included in the fund since 2010. The longevity of fund companies is an indication of their sustained commitment to a culture of health. The fund engaged in limited trading, dropping, adding, and re-balancing semi-annually at the beginning of each year and mid-year.
RESULTS AND DISCUSSION
The cumulative time-weighted total return for HAAF compared with the S&P 500 is shown in Fig. 3. The cumulative time-weighted return for the fund outperformed the S&P 500 throughout the 10 years studied, returning a 263.83% return on equity on December 31, 2018, compared with the S&P 500 total return on equity of 243.03%—a 2% per year advantage for the HAAF.
While other research has been published demonstrating the success of virtual portfolios of companies who have distinguished themselves through their commitment to workforce health, safety, and well-being, we believe this is the first article reporting on the actual results of a portfolio of publicly-traded companies chosen for their corporate culture of health, safety, and well-being.
Although the association between fund performance of a portfolio of companies who have demonstrated a commitment to their workforce's health and wellness is promising, there is still work to do. The authors recommend that this study be repeated for an additional 7 to 10-year period using the same methodology from start to finish augmented by immediately reinvesting dividends. Further studies may demonstrate whether our approach holds up over time and ascertain the impact of changes in economic and socio-political environments. Additionally, the authors welcome others to use different methodologies to select the best practice culture of health companies to provide valuable insights and superior performance. Lastly, the authors encourage researchers to study the impact on publicly traded companies in other countries to ascertain whether the correlation between the “culture of health” companies and stock performance is similar. We are aware of one such study performed in South Africa that provides preliminary evidence of positive financial outcomes for companies that support a culture of health and wellness.24
It should also be noted that in the case of the HAAF, dividends were not immediately reinvested as are done with the S&P 500 total return funds, reducing some potential for additional appreciation during periods of rising stock markets. So it is fair to say that the out-performance of the HAAF relative to the S&P 500 TR is even more impressive.
Current exchange-traded funds (ETFs) that focus on health are those that represent healthcare services, not investment into companies with established cultures of health, distinguished by caring for their workforce's well-being in remarkable ways. While there are funds that focus on socially responsible investing (SRI), which may incorporate environmental, social, and governance (ESG) criteria,17 the focus on the workforce's health and safety is unique. It perhaps represents an even better investment strategy in those companies focusing on a culture of health investing directly into the one asset that every business needs to thrive—the health and well-being of its people. The closest comparison fund we have found is the Parnassus Endeavor Fund (MUTF: PARWX), whose strategy is to invest at least 80% of net assets in companies believed in providing good workplaces for their employees.25 According to the fund prospectus, the strategy behind this criteria is that companies with good workplaces can recruit and retain better employees and perform at a higher level than competitors in innovation, productivity, customer loyalty, and profitability. Companies that provide good workplaces are selected based on “factors such as respectful and fair treatment of employees, employee satisfaction and engagement, pay and benefits, family-friendly policies, and support for volunteerism and philanthropy.”26
Companies with healthier workforces experience lower health care costs, less absenteeism, higher productivity, less workforce turnover, attract better talent, produce less waste, and experience higher employee engagement levels. All of these contribute to a competitive advantage in the marketplace and explain why this fund outperformed.
The COVID-19 pandemic has taught corporate America the importance of a healthy workforce. We now know that healthier employees are less likely to have a severe infection if they contract the virus.27 Underlying conditions such as heart disease, diabetes, lung disease, and obesity can set the stage for more serious illness and more difficult recovery.28 Companies with a benchmark culture of health and well-being are likely benefiting from a more resistant and resilient workforce.
Corporate cultures that foster health and well-being become part of the company's DNA. Employees both consciously and unconsciously make better and more healthy decisions and likely better business decisions. They understand that one of their responsibilities within these companies is to take care of themselves and foster healthful behaviors within their families and coworkers. The feeling of personal responsibility, in turn, encourages teamwork and collaboration. As social creatures, new employees joining a company with a culture of health are more likely to act in kind and eat a healthy diet, exercise, drink in moderation, and not smoke just like their colleagues. Suppose they have a health risk or condition. In that case, they are more likely to attend to it by establishing a trusted relationship with a primary health provider and appropriate specialists, adhere to medication schedules, and follow evidence-based guidelines for care.
Benchmark culture of health, safety, and well-being companies likely excel in other aspects of management. Therefore, this marker of investment-worthy companies may be an excellent proxy for organizations likely to outperform for many reasons. Companies who invest in health, especially those who are formally “graded” by the receipt of prestigious awards or investing in recognized corporate health assessment scores, demonstrate many critical leadership dimensions that not only help improve the health of their workforce but likely these leadership disciplines/characteristics spill over into other critical areas of management and human capital cultivation. These might include effective strategic planning, leadership engagement, program/product management, program/product integration, measurement and evaluation that are objective and verifiable, sustained commitment to excellence, employee engagement, training, retention, and advancement. It is also likely that companies with an influential culture of health may also be indicative of companies that have a more general culture of aligned goals between the firm and its employees. For this reason, establishing a method to identify benchmark culture of health companies may be an excellent way for fund managers and investor to identify enterprises worthy of investment, and provide another metric which employer leadership can use to demonstrate company value to the investment community.
LIMITATIONS AND CONCLUSION
This article features the performance of only one fund for one 10-year period, which invested in a finite number of companies. Additionally, our method of selecting portfolio companies has considerable subjectivity, and depends on publicly available information that may be incomplete or subject to error. The results are also not generalizable to firms with small capitalization, those not in the S&P 500, and non-US companies.
As this study further supports the merits of investing in companies committed to a culture of health, it may be prudent for the investment community to assess this commitment as part of the process to decide the merits of investing in any company. If one were to consider the investment into a promising company with an exciting business model but whose workforce carried a significant illness burden that the company was ignoring—rethinking the investment might be prudent. There might come a day when all companies published their culture of health score like they provide a credit score. With the pressure of the investment community, all companies would compete for being the healthiest. This marketplace approach might go a long way to mitigate the health care crisis, leveraging market forces.
Corporate leadership is responsible for capital appreciation and providing quality returns for its investors. Company executives should leverage this research to support their investment in their workforce's health, safety, and well-being. Fund managers and fund investors would be well served by including strategies like the Health Advantage Appreciation Fund's approach when evaluating investments in their portfolio. However, several changes would make this an easier task. The investment community should demand more transparent reporting of the workforce's aggregate illness burden and measures that evaluate the extent to which publicly traded companies deploy resources to manage the health and well-being risks and conditions within its workforce. Companies say their greatest asset is their people. However, today the investment community has no idea if employers put the necessary focus on the health, safety, and well-being of their workforce as they do to invest in the “health” or upkeep of their machinery and other capital assets. The investment community demanding more information on a workforce's health can create a virtuous circle of improvement. Suppose a culture of health gains the attention of the investment community. In that case, its importance may gain recognition by company leadership, and potentially additional employee health investments will be made. It is even foreseeable that all publicly traded companies will provide the investment community their culture of health score one day.
In a country where 62% of individuals with employer-based insurance has at least one chronic condition,29 companies that create a culture for a healthier workforce have a competitive advantage. Any investor who invests without knowing how the enterprise invests in their workforce is missing an essential component of company financial health and performance. However, now it is not easy to obtain this information. Investors can easily read reports that outline publicly traded companies’ commitment to workplace safety and environmental sustainability. Still, no such reports exist on a widespread basis for company commitment to a corporate culture of heath. We also consider the possibility that companies that focus on their workforce's health and safety build a culture of health and a culture of trust. This trust between employer and employees engenders engagement and commitment to the performance of the company. Trust is not a “nice to have” in the workforce; it is as necessary as optimal health for employees and organizations to perform at their best.30
Building a culture of health is a significant undertaking and requires long-term vision, investment, and commitment, but this undertaking may be vital to business and investment success. A portfolio of companies chosen for inclusion in a stock fund because of their approach to their workforce's health and safety outperformed the market. Of course, this association does not necessarily imply causation. Companies that focus on their workforce's health and safety may also use best practices in many areas of business management. Thus, excellence in health and safety may be a proxy for a culture of excellence in various domains. The literature, however, increasingly links the health of a workforce to business performance. More research is needed to improve our understanding of the value of building and maintaining an enterprise culture of health and its impact on business performance. The authors encourage corporate leadership and the investment community to support this research to guide their asset allocations and augment their success.
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