Why investors are attracted to the number zero.
Based on research by Vikas Mittal, Yan Anthea Zhang and Christopher Groening
To Build Value For The Long Term, Keep Customers — And Employees — Satisfied
- To succeed, a firm must treat its customers and its employees well. Both groups are important stakeholders.
- Investors rely on observable measures of how a firm treats its employees and customers as “signals” of true firm value.
- Consistency is critical for investors: Customer satisfaction is more positively valued when matched by employee satisfaction, and vice versa.
Three prepared organic meals a day, personal-fitness classes, health clinics, on-site oil changes, haircuts, nap pods and a spa truck.
No, we’re not talking about a retirement community in Boca. If you work for Google, this is your workplace. In 2015, for the seventh time in a decade, Google placed first in Fortune’s “Best Companies to Work For.” If you are an employee, you want to work for a company like Google.
And if you are a customer? You might look to Amazon, which topped USA Today’s 2015 list for best customer service – its sixth consecutive year at number one.
“We’re not competitor obsessed, we’re customer obsessed,” Amazon founder and CEO Jeff Bezos has said. “We start with what the customer needs and we work backwards.”
So employees want to work for Google. Customers want to shop with Amazon. But what about investors?
Sure, investors crunch the numbers. They look at balance sheets and income statements. They even hire bright-eyed MBA graduates to dig deep into SEC filings and search the footnotes for any informational advantage.
However, in addition to the quantifiable data, investors also rely on a firm’s observable characteristics and activities as cues to filter and sort in terms of value. In other words, how firms treat their employees and customers can be used as “signals” by investors in their assessment of firm value.
For example, employee perks, such as a profit-sharing program, can make a firm more valuable in the eyes of investors. Customer-related benefits, like the development of a better product following a successful R&D effort, can provide a similar boost. In contrast, lapses with employees or customers can undermine investors’ valuations. Large-scale layoffs (which negatively affect employees) or product-safety recalls (which alienate customers) send negative signals to investors about a firm’s long-term competitive advantage.
But how do investors make sense of multiple or conflicting signals? Recent research coauthored by Rice University professors Vikas Mittal and Yan Anthea Zhang explores the way investors take in the big picture.
The results show that when a firm consistently pleases both employees and customers, its long-term value increases. But if firms are inconsistent, making their customers happy but not their employees, or vice versa, investors will discount the success. This “cross-validation” effect is even more pronounced for businesses with a narrow business scope. (For example, 1-800-FLOWERS as opposed to General Electric.)
What does the cross-validation effect mean for firms? It means that marketing and human resources executives shouldn’t work in isolation, but coordinate with each other. And it means investors notice and value consistency across multiple stakeholder groups.
So, for example, Amazon has recently been criticized for its strenuous work environment. Jeff Bezos might be obsessed with customers, but Amazon could benefit more if its employees were seen to be happy as well. If the corporate environment is viewed as "bruising," then investors aren’t going to value the customer-related achievements as highly.
It is said that a person cannot serve two masters. But can a business? Mittal and Zhang’s research suggests that they should try. Business organizations can’t ignore any of their many masters (or stakeholders). Because investors, themselves a stakeholder group, pay attention to them all.
Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jesse H. Jones Graduate School of Business at Rice University
Yan Anthea Zhang is a Fayez Sarofim Vanguard Professor of Management in Strategic Management at the Jesse H. Jones Graduate School of Business at Rice University.
To learn more, please see: Groening, C., Mittal, V., & Zhang, Y. (2016). Cross-validation of customer and employee signals and firm valuation. Journal of Marketing Research, 53(1), 61-76.