It (Still) Pays to Be Good

The Hewlett-Packard-IBM story strongly suggests that, increasingly, the lower road does not compute.

The Worthiness Era is in effect.

That’s the take-away from the second anniversary of the Good Company Index, which shows that better-behaving companies outperform their peers in the stock market.

The index is the metric my co-authors and I created as a feature of our book Good Company. It assesses companies on their performance as an employer, a seller and a steward of the planet and communities.

When we first gave Fortune 100 companies grades on the Good Company Index, we saw evidence that it pays to be good. And the data keep reinforcing the conclusion that our economy has entered a Worthiness Era, in which the high road is the only road to sustainable success.

Annually, we are examining all “industry-matched pairs” (pairs of companies in the same industry) in the Fortune 100 in which the companies’ original Good Company grades differed by one or more full grade levels (for example, a grade of B vs. a grade of C).

Across those 12 pairs of companies that met this criterion, the stock price of the company with the higher grade outperformed that of its competitor with the lower grade by an average of 30.2 percentage points over the 2-year period following the assignment of Good Company grades.

Consider Hewlett-Packard and IBM. HP has been the less good of the two computer industry rivals. Its original Good Company grade was a C vs. IBM’s B+. And it seems to have paid a price for being “less worthy.”

To be sure, HP isn’t all bad. It has shown itself to be a solid steward through extensive recycling programs and a green manufacturing methodology. But it has been a less-than-stellar employer over the past decade or so.

In the book, we define a good employer as one that is exacting, caring and inspiring. On at least two of these three criteria, HP appears to have fallen short. For example, it has lacked an inspiring vision that employees can rally around. HP’s longtime “Invent” motto and more recent “Everybody On” slogan both miss the historical moment: People now want the companies in their lives to make the world better, not just create new stuff for people to use. And with multiple rounds of massive layoffs, the company has shown a degree of callousness to workers as well as ignored evidence that downsizing generally does not lead to success.

I’m not sure about the extent to which HP is exacting in its management—by which we mean measuring workers against performance goals and using data such as employee surveys to help guide the business. But what’s become clear is the goals and strategies HP executives have pursued have been faulty. The company has focused largely on cutting production costs on personal computers, has taken only halting steps into the mobile device world and has seemed to lose touch with its proud tradition of technology innovation.

IBM, on the other hand, has set a sound strategy tied to helping companies makes sense of “big data.” And it has voiced a corresponding vision that’s compelling to both customers and employees: building a “smarter planet.” IBM has cut jobs as well over the past decade. And it may ax more U.S. jobs in the months ahead. But it also has sought to ease or avoid employee pain through steps such as a program to help workers shift to careers in other fields.

Not surprisingly, IBM employees rate their company higher than HP workers rate theirs at feedback site Glassdoor.com. HP’s Glassdoor score two years ago was 2.6 out of 5, while IBM’s was 3.1—a difference that helped determine their respective Good Company grades. And their scores at Glassdoor continue to show a good employer gap: HP’s score has edged up slightly to 2.7 while IBM’s is a consistent 3.1.

The worthiness difference between HP and IBM helps explain the dramatic difference in their stock performance since we first gave them Good Company Index grades. The stock value of IBM increased by a cumulative 58.4 percent during the two-year period compared with a decrease of 53.4 percent in HP over the same time, for a 111.8 percentage point outperformance for IBM.

Goodness may not account for all of this divergence. But the HP-IBM story strongly suggests that, increasingly, the lower road does not compute.

That’s the effect of the Worthiness Era.

Ed Frauenheim is senior editor at Workforce Management. Comment below or email efrauenheim@workforce.com.