It Pays to Be a Good Company

Learning professionals already know employee development initiatives benefit employers and customers as well as employees. It helps make employees and organizations more adaptable and more able to respond to change. It also serves as the foundation for organizational innovation, as it’s never possible to innovate without learning something new. Further, a firm’s investment in training and development is an important predictor of its future stock price.

Despite the growing importance of human capital to companies’ survival and success, as of the mid-1990s, few standards existed to guide its measurement. The American Society for Training and Development’s (ASTD) benchmarking initiatives were launched to correct this situation by establishing a common definition for training and development investments with a general document for all parties to use. Early analysis of ASTD’s benchmarking data revealed a statistically significant relationship between a firm’s investment in employee development and its subsequent stock performance.

In late 2001, Bassi Investments turned the ASTD research into a live investment strategy and started investing in firms that make unusually large investments in employee development. At the same time, research by the company and two academic researchers, Paul Harrison and Jens Ludwig, concluded that the return on firms’ investment in human capital — as measured by their spending on employee education and training — generates super-normal returns. Even after establishing controls for a host of other potentially confounding factors — including a firm’s past performance — training expenditures still made a significant impact on subsequent stock price.

The finding is not the result of reverse causality — firms that have performed well in the past tend to invest most heavily in learning and development. It is likely that at least part of the reason for this super-normal return is that investments in human capital — specifically employee learning and development — are a non-reported investment buried in selling, general and administrative expenses. Hence, all but the most diligent investors are unable to ferret out which of these costs are investments that might generate future profitability. This may cause high-investment firms to be under-valued in the short-run.