Within Companies, Too, Education Proves Its Value

By Mark Hulbert

Shares of companies that spend the most on employee training and development outperform those that spend the least, a study has found. Nothing is new, of course, about the idea that in a so-called knowledge economy, a company's success depends greatly on the collective skills of its employees - its human capital. Companies that invest more in developing that capital should fare better.   For many years, however, investors had a big question about that investment theory: How can it be put into practice? Until recently, it was next to impossible to rank companies according to how much they spent on employee training and education. After all, companies typically do not report such expenditures on a separate line on their income statements, and annual reports and public pronouncements aren't much help, either, because they may pay only lip service to the notion that employees are the most important asset of a business.  

Those practical barriers were lowered in the mid-1990's, when the American Society for Training and Development, a nonprofit group, created a database with standardized information on employee training expenditures at hundreds of publicly traded companies. That database allowed companies to be ranked according to their training expenditures, and for portfolios to be constructed based on those rankings.   Over the last five years, these portfolios performed as the theory predicts, according to a working paper by four researchers: Paul Harrison, an economist in the research and statistics division at the Federal Reserve Bank; Jens O. Ludwig, an associate professor of public policy at Georgetown University; Laurie J. Bassi, chairwoman of Knowledge Asset Management; and Daniel P. McMurrer, chief research officer of that money management firm, which aims to use this research in managing clients' investments.  

Over those same five years, companies at the bottom  of the   training-expense rankings had significantly lower  returns. And the   researchers obviously couldn't include companies  that did not report   training expenses and presumably performed even  worse.   Skeptics might worry about the objectivity of the  results, given that the   American Society for Training and Development is  dedicated to encouraging   companies to spend more on employee education. But  the researchers focused   only the performance of these companies after they  had been identified by   the society, so hindsight bias is not likely to be  an issue.  Two standard caveats apply to the research. Because  the data go back only   five years, it is too early to predict confidently  that the pattern,   though crystal clear so far, will persist in coming  years.  Second, knowledge of a strategy's profit potential  can kill it, as more   and more investors try to exploit it. But I am not  particularly worried   about that effect in this case, because Wall Street  puts intense pressure   on companies to increase current earnings by cutting  expenses like those   for employee training. Such expenses also carry  indirect short-term costs,   like reduced productivity while employees are being  trained.  As a result, companies that resist short-term  pressure and spend heavily   on training are likely to remain few. The new  research, however, suggests   that investors will be rewarded for betting on them.         

Copyright 2002 The New York Times Company