Having time to catch up on some summer reading, I reached out to Christoph Butz in SUI who shared with me his Pictet paper on Job Creation [Do Stock Markets Reward the Creation of Jobs?, June 2006]. Pictet is a niche Swiss money manager with a sustainability team [Pictet Quants; Sustainable Investment] based in Geneve that previously put out paper citing the reasoning for a single measure of sustainability performance [see 'Less Can Be More…A New Approach to SRI Research" article at Socialfunds.com].
The study looks at 1677 companies of the MSCI World and the period from 1997 to 2005, we investigate whether the creation of jobs has been rewarded or penalised by stock markets. The ESG data comes partly from KLD as an "esteemed research partner through the SiRi company network". Most fascinating is the graphic looking to describe correlation between jobs and CSR, "JOB CREATION VS. STANDARD SOCIAL RATING" graphing a scatter graph plotting our the new job-based social responsibility rating (x-axis) versus a standard multi-criteria social SRI score sourced from SiRi company (y-axis) which concludes: "The scores are virtually uncorrelated."
SRI and sustainability is a notoriously complicated subject, more art than science. So personally I like the elegance of a model that simplifies. Others in SRI rightly point to company performance being multi-faceted and the narrowness of just one indicator. I think the idea deserves some air to breathe [like the air in Montana, fine]. After all, in assessing investment decisions in companies, analysts will default back to their single favourite indicator [EPS or EBITDA or forward P/E] to give their 15 sec. elevator pitch on a buy/sell/hold decision.
Acknowledging the drawbacks of having one factor assess the CSR performance of a company, I find the angle of inquiry by Pictet interesting "job creation eclipses all other labor issues as a key indicator of corporate social responsibility". Of course, cutting jobs may be the sign of a company trimming down to fight competition, or changing its product line-up etc etc. Currently, I understand that few CSR or SRI research shops are tracking job creation, or the switch from high quality to low-quality jobs.
As a quant money manager Pictet is interested in finding the fewest possible metrics to describe CSR/sustainability to fit into their numbers-driven model. The full title is a mouthful but gives you the direction: Do Stock Markets Reward the Creation of Jobs? Job Creation as a straightforward proxy for companies' "Social Responsibility" and its implication for performance.
See related story 6 July 2006 on socialfunds.com
A peer in SRI supported Bill's view, noting "The authors would seem to argue that any problems with [outsourced] jobs would eventually catch up with the companies, but that isn't necessarily the case - so far - for the companies that fall outside the radar screen of labor activists hunting down sweatshop problems, and that describes many companies. Since host country govts want the investment and are reluctant to rock the boat about labor rights abuses, you can't rely on local regulations to iron out the problems anytime soon, either".
The same day Bill's story hit [6 July 2006 WSJ] on my regular mornign T commute through Cambridge to Boston I read of a similar simplification [caveat, caveat] re. customer service: bottom line question - based upon your client service experience, would you recommend the company to your friends? A cutting question for market researchers everywhere!
The forward by Jean Laville,Deputy Director, Ethos Foundation, Geneva outlines the Foundation's interest in the study of job creation:
"We are convinced that the societal cost and the hidden, internal cost for the companies involved could – as a result of raising insecurity in many countries because of job cutbacks in one region and transferring them to an other region - backfire in the long term, eventually completely undoing the purported cost cuts or even turning them into the opposite.
... Ethos will support initiatives to understand more clearly the mechanism of job creation and destruction. Ethos recognises the urgent need for a comprehensive database in this area to provide sustainable investors with presently unavailable employee-specific information in
an appropriate way.
...We are convinced that modern ESG research cannot afford to continue to all but neglect the creation of jobs. Rather, this crucial aspect will be the cornerstone for all future and meaningful assessments of the social responsibility of companies. And it is precisely in this sense that the present paper does indeed make a most valuable and highly welcome contribution."
Mr. Butz concludes: "For some sectors and regions, the creation of jobs appears to play the role of a leading indicator with regard to a company’s future stock-market performance whilst for other sectors and regions, these results could not be confirmed."
I look forward to exploring this elegant idea in future.
Contents:
1. INTRODUCTION 5
2. LEGITIMACY OF USING JOB GROWTH AS A
PROXY FOR SOCIAL RESPONSIBILITY 6
3. SCORING METHODOLOGY: HOW TO MEASURE
JOB CREATION? 11
4. BACKTRACKING AND SIMULATION: TESTING ‘WHAT IF’
SCENARIOS... 14
5. PRESENTATION & DISCUSSION OF RESULTS: FINANCIAL
IMPLICATIONS OF JOB GROWTH 16
6. CONCLUSION: DOES IT PAY TO CREATE JOBS? 23
7. APPENDIX: JOB CREATION BEYOND MERE HEADCOUNT -
EXPLORING SOME MORE IDEAS
Pictet Do Stock Markets Reward the Creation of Jobs?
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