Thank you very much, Millicent. It's really nice to be here and to work with Great Place To Work, which I've done for many, many years. I really appreciate the data that you've provided on a very important topic for company performance.

So what I'm going to look at today is can human capital management deliver better financial performance? And you might think, well, that's an obvious question. Aren't we all here because we believe that human capital management is really important for a company?

But academics have this annoying habit of taking something which is really simple and overcomplicating it. So what is an academic's answer to almost any question? It depends. And I'm afraid that's the answer I'm going to give you is it depends on how we define good human capital management.

Because the views of this have changed a lot over time. And even right now in 2024, along across different organizations, different firms will have different approaches to managing their workers.

So, what was the traditional view? One of the greatest business leaders of all time was Henry Ford. So he was seen as a great innovator. So he's credited with the quote: If people had asked me what they – if I ask people what they wanted, they would have said faster horses. He instead invented the car. Well, actually, that was wrong. He didn't really invent the car. The car had already been invented, but he invented the first way to mass produce a car at scale. And that was using the assembly line.

So the idea of the assembly line is if you force people to keep up with the pace of production, this would make sure that employees will work hard. You'll get as much out of them as possible. A bit like squeezing every last drop out of a lemon. So that's the goal of the assembly line. And obviously he wanted to treat his work as well. But back then, there was one way you treated your workers well, which was you paid them. Money was really the only thing that mattered because living conditions were relatively difficult. He was the first to pay them $5 a day.

And the idea is it doesn't matter how hard you work somebody, as long as you pay them, you compensate them with money. That is enough. And that's why the word compensation continues through today, which I find bizarre. Right? You get compensation for an injury. You shouldn't get compensation for something you love to do. But many people's view is that work is something that you need to be compensated for.

And so if you're just to illustrate this with a simple diagram, if you think the value that a company creates can be illustrated by a pie: that pie can be split between investors in the form of profits, and workers in the form of pay or, more generally, working conditions – a vibrant corporate culture, skills development and training.

And often you might think, well, if I'm to treat workers, if I'm to make more profit, I need to take some of that pie away from workers. And so that is what's seen as good human capital management. If I can extract more value from workers, through working them harder, then that will give more profits to investors.

Well, you might think, well, what I've shown you is a bit of a caricature. Right, so that was 100 years ago. We don't have those practices anymore. What relevance does that have to 2024? Well, in fact, it does have relevance because there are some organisations which have similar approaches.

So this was my first desk in my first job, I was working for Morgan Stanley in Canary Wharf as a very junior investment banker. And the rule here, again, was if they would work you really, really hard, then they could get as much out of you as possible. And then as long as they compensated you with good salary and promotion prospects, then that was enough.

And indeed, what was a great boss? It was one who would squeeze a lot out of his or her workers. It was mainly 'his' back then in 2003. And so there was a boss called William Verica – I shouldn't really mention his name, but let's call him William, who was known as being ‘the terrorist’ because of how hard he worked his employees. And this was seen as a badge of honour.

And that was London. And then I went to New York City with Morgan Stanley. There's a guy called Bill Brown who was known as ‘Badass Bill’ because of how hard he worked his employees. So this was what was seen as human capital management, even in organisations like Morgan Stanley, where you think human capital is the most important asset. But what I want to look at, and hopefully this will resonate with a lot of you, is a different way to manage your workers. How even some really successful organisations might not be adopting their most effective approach.

So this traditional view is you treat workers like any other input. So with raw materials, you want to pay as little as possible for them and to use up all those raw materials. You don't want any to be unused. That's just inefficient. And so the traditional view was, well, workers are effort averse. Unless you want to manage them, they will slack off and they are unintelligent, or just less intelligent than those at the top. Those at the top, they have a lot of experience; they know how best to do things. So the goal of a manager is to tell those down below the best way to do things and to ensure they follow those procedures. And that might work in some organisations. So organisations, let's say mining, where safety is paramount, you might think this command and control approach is important in order to protect the workers' safety.

But the more modern view is that, well, we don't have human resources, but we have HUMAN resources. So you focus on the word 'human' here. And so what is different between humans and any other input into production is humans are intrinsically motivated, right? They want to do things that challenge themselves. So, often, let's say in a gym, if you have too easy a workout class, some people will be upset. They want to be challenged. They want to do things which have a sense of achievement. And they’re also intelligent. It may well be they're closer to the action, so they know better what to do, rather than just listening to the boss up high.

And so a simple way to think about this is the difference between Theory X, where you have a worker refusing to work, and Theory Y, where a worker actually celebrates the opportunity to work because this is where they have fulfillment and achievement, and can feel that they're really making a difference. So the question is: Well, how do we measure whether an organisation is acting according to Theory Y, and having this modern view of human resources, not human resources? Now, there's lots of other measures out there of treating employees well. But some of them have problems. So some of them might be stated policies. So nowadays, I'm sure you could use artificial intelligence to scrape the data on a company's website about how they treat their workers. But you might say something and you might not actually put it into practice. Or you could look at certain superficial outcomes: So something that I obviously care about as an ethnic minority is diversity. But demographic diversity might not actually tell you much about the diversity of corporate culture, whether the culture is inclusive and psychologically safe.

And some other measures are good, but they might only be recently available. So right now, in a world in which people are looking beyond just shareholder value, but at stakeholder value more widely, people do understand the importance of treating workers well. There's also environmental measures and measures of responsibility, but that is something which is only recent. And if I showed you that companies that treat their workers well do well, but only based on five years of data, you might think, well, it could be that it was lucky for those five years, or those five years were on unusual economic conditions.

Perhaps it works in a pandemic. Maybe it doesn't work in different times. So this is why it's been great, actually, for nearly 20 years for me to have worked with the data from the Great Place To Work Institute. My initial data set used the data in the United States because the Best Companies to Work For List, which is the analogy of the Best Workplaces here in the UK, was available from 1984. I had tons of data.

And what data do I have? So, what do they measure here? There are 58 different questions, as I'm sure you know. Initially, there were 58 when I was to do the survey. They looked at specific dimensions. It’s not just “are you happy?” but specific elements—credibility, fairness, respect, pride, and camaraderie. This is far more than things that you might be able to measure with, say, the CEO to worker pay ratio, the number of days of holiday, or the number of formal days of training. Clearly, all of those things will matter.

But what really makes somebody come alive in the organisation is not just those stated policies, but how a boss makes you feel; whether they treat you as a person; whether you have opportunities for skills development and enrichment, and meaningful work. So, what I wanted to do was to look at the companies that are on this Best Companies to Work For List. How do they perform in terms of shareholder returns? Why? Because there are many people who have this fixed pie mentality, which is the belief that if you're treating your workers well, that costs you something that must be at the expense of profit.

But what I found was not—it was actually the opposite. This was the first paper I published on this topic, which looked at the link between employee satisfaction and firm value. What I did is I took 26 years of data. If you can read the small print, it spans from 1994 to 2009. During those 26 years, I found significant outperformance. I then extended it for two more years. When I looked at 28 years of data, I found that the Best Companies to Work For outperformed in terms of total shareholder return by 2.3 to 3.8% per year over a 28-year period, which is equivalent to 89% to 184% compounded.

I believe this fundamentally changes the way that companies should think about human capital management. It is not about a fixed pie mentality—let’s squeeze more out of our workers to give more profits to shareholders—but rather that the pie can be grown if we invest in our employees. Yes, that costs us something in the short term, but in the long term, they become more motivated, more productive, and more likely to stay. As a result, the pie grows, and then shareholders do better off in the long term.

You might think, well, there’s a conference from the Great Place To Work Institute. Why is it that they have a finance professor come and speak rather than a professor of human resources? Because often finance is seen as the enemy; finance is trying to hold on to the purse strings and saying, well, these things are a waste of money. However, my research suggests that any finance person with that mindset is not doing his or her job. What we're looking at here is that these factors are accretive and supportive of financial value, and not at the expense.

Since the paper came out in 2011, over the past ten-plus years or so, I have been trying to share this with finance professionals. While I'm not going to claim that every single person is converted, increasingly, finance professionals understand the importance of this and are trying to assess corporate culture as being a really important investment criterion. One firm I've worked with is Ninety One Asset Management, which used to be called Investec. They developed a corporate culture framework in order to analyse the quality of a company's corporate culture.

Believing this to be financially valuable material, there was another investor, a very leading investor in the UK. She tells me when she meets the CEO, she asks the CEO about, "Well, how are your people? What are their challenges? What are you trying to do to address them?"

And she says, "Well, some CEOs will give a good answer." Other CEOs will say, "I didn't know you were going to ask me about my people. Next time, I'll bring along the HR Director."

And so this shows which of the CEOs believe that their people are a CEO-level issue and which believe that it should just be delegated to an HR Director. What I'm trying to highlight here is that even if you think, "Well, I really should care about financial performance," then if you do really care about financial performance, you want to care about the biggest driver of financial performance, which is your human capital.

And so what this suggests is that when you treat your workers well, you increase the yellow, but not through giving part of the pie to investors or taking pie from investors, but growing the pie. Then investors will be better off.

Now, you might be sceptical here because you might think, "Well, is this correlation or is this causation?" So I seem to be spinning a story that if you treat your workers well, then financial performance is better because workers are more motivated, more productive, and more likely to stay.

But could it be the opposite? Once the company is already performing well, then it can start spending money on employees. It can have free gyms and more holidays and so on. Or maybe there are other factors that drive both.

If you're in the tech industry, maybe workers are happy because maybe it's a more fun job than, say, the coal mining industry. And also, the tech industry has outperformed the coal mining industry. So maybe it's an industry effect and not a direct link.

A lot of the work that I needed to do was to rule out those alternative explanations and to suggest that it's employee satisfaction that causes financial performance rather than the reverse. I'm not going to bore you with all the ways I did to try to address that, but this is certainly addressed in the work that I did to show that this is the link.

So rather than boring you with all that statistical methodology, let me change tack absolutely completely to something I'm sure you never thought you would hear when coming to this conference today, which is: jumping out of a plane.

So if unfortunately you had to jump out of a plane because it was dangerous, should you wear a parachute? Now, you might think, "Well, this is obvious. Why are academics overcomplicating this?"

But actually, there was a study published in none other than the British Medical Journal, which found that having a parachute has no effect on whether you survive a fall out of a plane.

So what they did is they got some volunteers to jump out of a plane and they randomized it. This is perfect in terms of randomization. Half of them were randomly given a parachute, and half of them were given nothing at all. They found the death rate was the same. The same number of people died with a parachute as without.

Well, how could this be? And how is this study even ethical in the first place? Well, it's because the parachute was grounded. So they jumped out of a plane that was already on the ground. The jump was two feet. So clearly the parachute does not matter.

But even if the parachute does not matter when you jump out of a grounded plane, it could still matter if the plane is 10,000 ft in the sky. So what you find being true for these very small jumps might not apply in a different context, which is a plane that is actually flying.

Well, what on earth has that got to do with today's discussion? The importance of context. Because if you looked at my old data, this whole data was based purely on the United States. I took data from the US Best Companies to Work For, and I show that in the US, the Best Companies to Work For indeed outperformed.

But I can't just assume that this applies to the UK. I can't take something gathered in a completely different context and apply it to a new context like the UK. Just like some of you might know the controversy surrounding Malcolm Gladwell's 10,000 hours rule, the idea that you can become an expert in anything if you practice for 10,000 hours.

He took a study which was just in violin playing, and claimed that it applied to almost any activity. So, rather than just misapplying something out of context, I wanted to actually do the research myself in the UK. Huge thanks to everybody at Great Place To Work UK for giving me this data.

What they gave me was the data of the Best Workplaces. The Best Workplaces are categorized by different sizes. But what I wanted was the ones that were publicly traded so that I could look at the stock price performance. Now, clearly, the stock price is not the only measure of performance. However, I wanted to look at stock market performance because you can control for a lot of other factors.

Some people might be concerned that if a company builds its human capital, that is risky compared to building plants and machines. If you go bankrupt, you can at least sell the plants and machines, whereas people might walk out the door. So I can do things like controlling for risk. But after all those controls, what I found in the UK was arguably even stronger than in the US.

If you started in 2001 and held the FTSE All-Share Index, then you would have started with £100, and it would have grown to £330, reinvesting dividends. But if you bought the Best Workplaces in the UK, and then every time a new list came out, you refreshed that list, then you would get £993.51. That is what's known as an equal-weighted portfolio. I would invest in all of the Best Workplaces equally.

Some people might think, well, then you might be disproportionately investing in some smaller companies, and that might be a hard strategy to do. Instead, what you could do is evaluate it, where you put more in the larger companies, which can give you an even higher return of over £1,000.

But what we find here, rather than looking at the small differences between these, is the big differences between these Best Workplaces portfolios and just holding the market. There does seem to be strong evidence that treating your workers well absolutely pays off in the UK, just like it does in the US.

What I want to do, and I hope to have some time in the end for a Q+A, is just to change tack to look at some other human capital measures. In fact, more popular ones have come up quite recently, which arguably show even stronger results than in the US. This revisits diversity, which I alluded to earlier.

Now there are many investors and media, even customers, who might not look holistically at being a great place to work as the Best Workplaces study does. Instead, they might focus on just one thing: diversity, because that might be easier to measure. You don't really need to go in and survey workers. There was a study which claimed that higher levels of gender diversity are positively correlated with better future financial performance.

Now, that’s a great statement in the conclusion, but it was not supported at all by the data. They ran 90 different tests, and not a single one led to a significant result. Yet they claimed to have a significant result in their conclusion. Why? Because they thought people wanted this to be true. They wouldn't actually check the data. This is embarrassing for me because it was my own institution, London Business School, that came up with this.

This shows the danger of confirmation bias. We would all like to believe that treating your workers well leads to better performance, but it needs to be backed up by more than just wishful thinking. That’s why I had to submit my paper to a peer review journal to be scrutinized.

Let me revisit diversity, because you might think, well, this is a rather uncomfortable thing to end my talk with if diversity doesn't actually improve financial performance. But does this actually measure diversity? There are other ways you might measure diversity. Often, people think that it's actually diversity of thought or cognitive diversity. Now, that might be correlated with gender diversity or ethnic diversity, but it’s much more than that.

If you reduce a person to just their gender and ethnicity, you ignore the totality and humanity of a person. That gives the impression that if you're a white male, you can never add to the diversity of an organization, even if your background is in humanities and everybody else’s background is in sciences. Or maybe you are the first in your family to ever go to university. Perhaps you've lived in many countries around the world.

So what I wanted to do with my co-authors was to create a broader measure of diversity than just gender and ethnicity, but also to measure equity and inclusion. It’s not enough to just have a broad mix of people; it’s essential to ensure that they feel included and psychologically safe.

How did I get this broader measure? I went back to the most trusted data source on human resources out there, which is Great Place To Work. Out of all the questions they have, some are not related to diversity. They’re things like, “I'm given the tools and resources to do my job.” However, there were 13 questions that we thought were related to this broader measure of diversity, equity, and inclusion.

This is a psychologically healthy place to work. I'm able to be myself. I'm able to challenge; people here are treated fairly regardless of their age, race, sex, or sexual orientation. That can certainly correlate with the proportion of such people in the workforce, but it’s more than that. What matters is not just having people from a broad set of backgrounds in the organization but making sure that they feel valued.

What we found with this broader measure of diversity, equity, and inclusion is that it bore very little relationship with the demographic diversity measures that we typically focus on. There are many companies that are hitting the target but missing the point. They might be putting certain minorities into the company in visible positions in order to claim to be diverse but not actually changing anything in terms of the corporate culture.

Why does that matter? When we linked this to future performance, we found that our broader measure of DEI was positively correlated with performance along many dimensions: financial performance, valuation, and also innovation. That’s the idea that if I have a diverse mix of people, there will be better ideas and more innovation, but demographic diversity is not a guaranteed factor in that.

Many organizations have what I call an "add diversity and stir" approach. They think it’s enough to bring in a diverse mix of people and then allow them to do their thing, hoping that something will happen magically. But it’s much more difficult than that; you need to be intentional about this.

So how could you do this? In meetings, it could be something as simple as allowing junior people to speak first so they don’t latch onto what the seniors have already said. Even that might not be enough, because sometimes in meetings, the agenda has been released beforehandand you hear people discussing the agenda around the office, watercooler and you figure out what the seniors think.

So even if the juniors are called on to speak first, they latch on to what they think the senior will want to support. There are some organisations, like Amazon, who have what's known as a silent start. They do not release any agenda before a meeting or any pre-reading. They devote the first 30 minutes of that meeting to just reading the agenda in silence, and so there's no chance to discuss it. And so when the juniors are called on first, then they are expressing what's truly their own view.

Now, the danger of me speaking about something like this is that I have to follow my own advice. A few days ago, I'm on a board where I got a proposal in from somebody externally, and I thought this proposal didn't make sense. But I thought I needed to forward it to the rest of the board and also forward it with my own comment. So I forwarded it. At the start, I said, "Here is a proposal from X. I appreciate them offering to partner with us, but I don't think this will work for the following reasons."

But then I thought, well, that's problematic because then the first thing they would have read was my reaction to the proposal rather than the actual proposal. And so they would be prejudiced by my views. So instead, I said, "Here's a proposal from X. I will put my views at the bottom of the email after you've read it." And then actually, people came back to me and said, "Oh, actually, I agree with all of your concerns. But when I read into the suggestion, there was a possibility for something else in terms of a partnership which addresses your concerns, and they would have missed that had they been skewed too much by my initial reaction to it."

And then this is really important because we often think that treating people well involves a huge amount of expenditure. Can we put a yoga studio into our workplace? Now, those are not bad things, but those things are costly. Just small, intentional things to give people time and space to have a different view can really make a difference.