A (Weary) Champion for Employee Investment

August 11, 2009
For more than a decade, Laurie Bassi has been the prophet of investing in companies that invest in their people.

Bassi, 54, co-authored a groundbreaking study showing a link between investments in training and company success. Later research demonstrated that companies that spend more on training on a per capita basis do better in the stock market in the year following the investment than do those companies that spend less. Bassi also created an investment fund designed to prove in hard dollars that employee development pays off.

Especially in today’s knowledge-based economy, healthy training investments make sense, Bassi argues. What’s more, she says, training budgets could signal whether a firm is focused on a long view of success.

“Training investments may well serve as a proxy for the degree to which a firm is willing and able to take a long-term perspective, rather than focus excessively (and destructively) on quarterly earnings,” Bassi and her longtime business partner Dan McMurrer wrote this year.

But after years of proclaiming the wisdom of putting money into firms with big training budgets, the economist-turned-business consultant has become frustrated with the two communities that seem like they should be ardent adherents.

There’s the investment community, which shows little interest in the power of training data to predict company performance. And there is the HR community, which seems not to care about using the financial market to reinforce sound people management practices.

Even though her investment portfolio has outpaced the market as a whole, and despite her recent finding that spending on training is a very strong predictor of bank stock prices, Bassi isn’t sure how much longer she wants to continue the fund.

“I’m losing interest in this,” she says. “It’s a lot of work. It’s a labor of love.”

It may be an unrequited love, given how hard it has been for Bassi and McMurrer to pry data on training budgets out of companies.

Bassi and McMurrer will be vindicated someday, predicts Rick Frazier, an analyst with hedge fund firm Diamondback Capital. Frazier uses Bassi and McMurrer’s data as part of an investment strategy that considers multiple stakeholders in companies, including employees.

“They are ahead of the curve,” Frazier says. “What mostly surprises me is that the HR community hasn’t latched on to the work that they’ve done.”

Studying business outcomes
Bassi’s interest in people management can be traced to Cornell University, where she earned a master’s degree in industrial and labor relations. She also earned a doctorate in economics from Princeton. Afterward, she taught for a number of years at Georgetown. One of her brightest students there was McMurrer, who was pursuing a degree in public policy. When Bassi took on the role of vice president of research at the American Society for Training & Development professional group in 1996, she invited McMurrer to come with her. McMurrer, now 41, joined her there the next year.

At ASTD, the two of them launched a broad benchmarking project designed to see what companies were spending on training and development, and how those investments related to business outcomes.

Data they gleaned at ASTD all but knocked their socks off. In a study of 40 publicly traded firms, Bassi and McMurrer found preliminary evidence that companies that invest more heavily in training and development were more successful and profitable. Firms that spent heavily on training showed more net sales and gross profits per employee.

But the most striking difference between big and small spenders on training had to do with stock performance. Bassi and McMurrer looked at a metric known as market-to-book ratio. That ratio considers the market value of all outstanding shares of company stock against the firm’s “book” value, defined as its net assets minus liabilities. Over the course of 1996 and most of 1997, companies in the top half of spenders on training per employee in 1996 increased their market-to-book ratio, on average, by more than double the increase found for the bottom half of spenders.

In the wake of that study, Bassi and McMurrer—and two other researchers—undertook a larger investigation of about 390 publicly traded companies. That 2004 study also found a strong link between training expenditures and subsequent stock market performance.

Preaching the gospel of training
To Bassi and McMurrer, the findings pointed to a tidy way to help investors, companies and employees all at once.

The pair appeared to have proof that training budgets were a key data point that investors ought to know about. The research also indicated training ought to be seen as an investment, like research and development, that had a future payoff—rather than as a standard administrative cost.

And, they theorized, if some companies began to disclose their training spending, pressure would build for others to show that they, too, were investing in people—to the benefit of both firms and workers. “That’s what we felt in the late ’90s, early 2000s,” McMurrer recalls. “It felt very much like it should be a very elegant win-win situation.”

In 1998, Bassi and McMurrer published preliminary results in ASTD’s Training & Development magazine. To reach a broader audience, they wrote op-ed pieces and submitted them to major publications such as The New York Times. But they got no takers.

Bassi, who describes herself as “passionate” and a “person of principle,” was perturbed that people weren’t moved by the research. She couldn’t understand why somebody wasn’t doing something about the findings.

“One day I thought to myself, maybe I was that somebody,” Bassi recalls.

So in 2001, she and McMurrer decided to start their own investment fund. They would invest in companies with the heftiest training investments and seek to prove their point in the currency the stock market appreciates most: money.

They decided Bassi Investments would be small and would manage funds by “separate accounts,” as opposed to mutual funds like those offered by Fidelity or Putnam. Still, to become registered investment advisors, Bassi and McMurrer had to pass a competency test known as the Series 65 exam. They had to take on the burdens of fiduciaries—meaning they had to act in the best interests of their investors. They had to report individual account performance to each of their investors.

The data hunt
And, given their investment strategy, they had to obtain data on corporate training budgets. By 2001, the pair had moved from ASTD to a stint at HR software firm Saba to starting their own Golden, Colorado-based consulting firm focused on people management, McBassi & Co. Since they were no longer a part of ASTD and now were on a mission to make money in the stock market, Bassi and McMurrer now could not pitch their data-gathering as part of a pure research project.

They got some information from public sources, such as Training Magazine’s annual list of the top 125 training organizations. But the magazine does not disclose the per-capita training spending for many of the firms on the list. To deepen their database, Bassi and McMurrer turned to old-fashioned phone calls. And they found that firms often were reticent to provide information on training spending.

“Collecting the data is so hard,” Bassi says. “We would hope that after having been at this for so many years, it would have gotten easier. It has not.”

Bassi says most HR and training leaders haven’t been enthusiastic about her data requests, and often do not know what they are spending. Investor relations officials also have not been very interested in providing data on training spending, Bassi says. In her view, companies have been wary about making training expenditure data public in part because it amounts to sticking their necks out. In the absence of many companies providing data on training, information coming from just a few firms would leave them exposed to criticism that they were spending too little—or too much, Bassi says.

She now believes federal law ought to change to require publicly traded firms to disclose what they spend on employee development.

“It’s not in the interest of any one firm to do this,” he says. “It would take coordinated public policy.”

Beating the market
Even without such a requirement, Bassi and McMurrer have gathered data on scores of firms. That has been enough data for them to invest in companies—typically 35 firms at a time—for their main portfolio, which seeks out big training spenders.

As with all investment funds, Bassi Investments stresses that past performance is not a guarantee of future results. But Bassi and McMurrer say their main fund—launched in 2003 to closely hew to their earlier research on training spending—has outperformed the broader S&P 500 index by about one-third on a cumulative basis over the past six years, prior to management fees. Even taking those fees into account, the portfolio has outperformed the S&P 500, Bassi says.

In part because of insights from their consulting work, Bassi and McMurrer broadened the investment strategy at Bassi Investments last year to take into account additional people management information.

Still, their primary data point—training spending—was vindicated again in a study Bassi and McMurrer published this year on the banking industry. The report is based on 30 observations about companies in the sector, one of the industries for which Bassi and McMurrer have gathered the most data. The researchers conclude that changes in annual training budgets accounted for nearly half the change in banks’ stock performance relative to peers a year later.

Diamondback Capital’s Frazier says his firm considers a broader range of stakeholders than simply employees, and gives particular weight to a company’s relationship with its customers. But the hedge fund analyst calls Bassi and McMurrer’s bank sector report solid. He can’t understand why HR and learning executives don’t cite this sort of research from Bassi and McMurrer more often.

“It seems that this is the type of work you’d point to to demonstrate why these investments in people are the types of investments to make,” he says.

Enthusiasm ebbs
It’s unclear how much influence Bassi has had in the HR and investment worlds. Her quest to get companies to reveal their training spending for all to see has proved quixotic so far.

But there are other signs companies are taking training more seriously. According to ASTD, direct training expenditures made up 1.98 percent of payroll in 2001, not counting benefits or taxes. In 2007, the figure was 2.15 percent.

And during the recession of the past 18 months or so, companies have not axed training in knee-jerk fashion as they might have five or 10 years ago, says Pat Galagan, executive editor at ASTD. In contrast to the old saw that training is among the first things to go in a downturn, not all organizations trimmed their employee development budgets, and some increased spending, she says.

If organizations are clearer about the connection between training and business results, Bassi’s work has served as a foundation, suggests Galagan, who has been at ASTD for 25 years and has served as editor of Training & Development magazine. In particular, Galagan cites research Bassi did in the late 1990s while at ASTD.

“The work she did in linking investment in training to company performance and stock performance was very, very important, and it was an original idea at the time,” Galagan says.

But Bassi’s enthusiasm for touting the training-performance connection appears to be ebbing. In particular, Bassi Investments may not be long for this world. McMurrer said he and Bassi have mixed feelings about the fund. It’s hard, he says, to let go of the vision behind the firm: harnessing the market to motivate companies to boost employee development. On the other hand, it consumes 10 percent of McMurrer’s work time, as well as a small chunk of Bassi’s. And the tasks—such as assembling year-end tax reports—aren’t particularly rewarding, McMurrer says. “It would be fine with us if we never made another of those phone calls” seeking training data, he says.

The new message
Bassi may be close to done with her stock market venture, but not with her overall mission. One of her latest projects is a book about how trends in globalization, technology, regulation and demographics are leading companies in a new direction.

Together, Bassi says, these factors seem to be compelling firms toward a longer-term perspective and greater “reciprocity” with customers and other stakeholders. Better treatment of employees also is part of the equation, she says.

Bassi hopes the book, whose working title is The Worthy Organization, could become a best-seller in the vein of Jim Collins’ Good to Great.

In Bassi’s view, the stock market has penalized—in the short run—firms that invest in people. Those people investments are treated as a cost and drag on earnings. Even if Bassi’s work up to now hasn’t changed that situation much, bigger trends such as globalization may do the job.

In other words, the prophet has a new, larger message.

“Increasingly, it will just be good business to be ‘worthy,’ ” Bassi says. “It would be a good thing for the world.”