The link between employees satisfaction and firm value A challenge for companies

around the world

1. Introduction
It is clear right from the start that there is a legal and economic relation between
employees and organizations, relation which evolved across the years and received from
academic literature various definitions (Marrewijk, 2003) and valences, under the influences of
CSR concept.
As I said, this relationship evolved in time, actually this evolution depends on CSR
evolution and employees as stakeholders was subjects to theories like agent view based,
stakeholder theory, human resources theory and so many others that investigate the impact of
stakeholders on companies financial performances, so the aim of this paper is to prove that
employees, as the most valuable assets of a firm, could increase an organization value.
Thus, even if the relation between employees satisfaction and firm performances seems
simple at first glance, is necessary to reveal the impact of CSR practices over the employees
satisfaction, and only after this the analyze could be performed.
When the CSR concept started to gain importance? To answer to this question I will
present the classic debate between Adolph A. Berle in the position of being the grandfather of
shareholder primacy (Matheson and Olson, 1992) and Merrick Dodd who is cast as the original
ancestor of CSR (Winkler, 2004). Dodd claimed that it was undesirableto give increased
emphasis at the present time to the view that business corporations exist for the sole purpose of
making profits for their stockholders, instead corporation should act as social institution
(Bratton and Wachter, 2008). Furthermore, Berles response was that is theory not practice and
shareholders need to provide safety, security, or means of support for that part of the community
which is unable to earn its living in the normal channels of work or trade.

Even

though

the aforementioned authors were specialized in corporate law not in finance or management
field, they highlighted that the unique purpose of a company, financial success or maximization
of shareholders profit, was not enough thus companies need to manage their commitment and
responsibility towards the environment they operate (Bar Zuri, 2008).
Further, if Dodd is seen as the first who put on stage the companies social responsibility,
Bowen (1953) defined CSR for the first time: It refers to the obligation of businessmen to

pursue those policies, to make those decisions, or to follow those lines of action which are
desirable in terms of the objectives and values of our society, and should be called the Father
of Corporate Social Responsibility (Carrol, 1999).
During the years many theories pro and con CSR were launched, an example is
represented by Milton Friedmans article The social responsibility of business is to increase its
profit (1970) in which he mentioned that only people have responsibilities and a corporation
is an artificial person and in this sense may have artificial responsibilities, but business as a
whole cannot be said to have responsibilities, even in this vague sense while McGuire (1963)
argued that corporation must take an interest in politics, in the welfare of community, in
education, in happiness of its employeesas a proper citizen should.
As a conclusion to these statements, corporations with a long and deeply image in U.S.
culture which have spread all over the world, powerfully influence the quality of life, affecting
consumers, employees, investors, the environment etc. (Johnson, 2012). But how companies
affect the employees and the rest of stakeholder lies in culture differences, therefore if companies
embrace the shareholders culture, they will increase their results and simultaneously will
decrease stakeholder orientation (Popadak, 2013) and on the other way if they adopt
stakeholder culture they will decrease their short term earnings and increase the long term
performances (Edmans, 2011) .
After this short presentation of CSR roots, critical and positive views, the paradoxically
question which arises is why if a company purpose is to make profit and to enrich the lives of its
stakeholders (Freeman, Velamuri and Moriarty, 2006), why does it need to be social responsible?
The answer of this question does not align with Milton Friedman affirmation since the
only social responsibility is to increase profits profound marked by Western culture, however
just to make profit is no longer enough, thus a company needs to integrate the economic
responsibility to investors and consumers, legal responsibility to the government or the law,
ethical responsibilities to society, and discretionary responsibility to the community (Caroll,
1979).Consequently this could lead to higher financial returns and to the development of
valuable intangible assets (Hillman and Keim, 2001), such as relations with primary stakeholders
(Freeman, 1984) which can be a solution for market competitiveness.
Previous studies have analyzed the impact of CSR or the impact of CSR, as employees
satisfaction, on firm financial performances (Aupperle, Carroll, and Hatfield, 1985; Griffin and

Mahon, 1997; McGuire, Sundgren, and Schneeweis, 1988; Pava and Krausz, 1996; Waddock and
Graves, 1997; Edmans, 2012) but until now none of this studies bring clear empirical evidence in
order to prove this relation.
Thus the questions of this study is if the employees satisfaction generated by a sociable
responsibility behavior of a company conducts to better financial performances which increase
firms value, and how can this improvement be measured and if employee satisfaction depend
on country and stakeholder country.
2. Theoretical Background and hypothesis development
For many decades human resources and their potential to add value to companies have
been neglected (Aguilera et al., 2007; Aguinis and Glavas, 2012) by organizational management
scientist (Boudreau, 2004). However, on the other hand they were subjects to various behavioral
organizational and psychology studies; hence attitudes such as job satisfaction, loyalty and their
commitment toward organization have been left largely unexplored.
It seems that behavioral scholars figured out that employees satisfaction represents a
vital factor for organization success. Vroom(1964), developed the Expectancy Theory and
discovered that people choose to work in organizations having expectation about their needs and
motivations, and they tend to be motivated if they believe that strong effort will lead to good
performance and good performance will lead to desired rewards, while Hertzberg (1976) with his
Motivation Hygiene Theory, showed that employees motivation and satisfactions consists of
recognition, achievement, responsibility, advancement, personal growth in competence (intrinsic
factors) while employees dissatisfaction is related with company policies, pay plans, working
conditions and supervisory practices (extrinsic factors). Finally Maslow (1947) defined 5
fundamental levels of needs: psychological, safety, belonging, esteem and self- actualization,
which can influence job satisfaction.
This behavioral approach about what people do or need when they work and also about
the interest in job satisfaction (Salancik and Pfeffer, 1977) is the base for CSR strategies and
helps companies in maximization of employment relationship.
2.1.

Theory on the value of employees

Since employees can affect or can be affected by organization, they correspond to

Freemans classic definition of stakeholders any group or individual who can affect or can be
affected by the achievement of the organizations objectives (Freeman, 1984). But stakeholder
and management literature defines stakeholders in various ways, such as groups to whom
corporation is responsible (Alkhafaji,1989), or as those groups "on which the organization is
dependent for its continued survival" (Freeman and Reed,1983), and along with the stakeholders
theories evolution, their definitions and categorization evolved to and become more complex, so
Clarkson (1995) defines stakeholders as those who have placed something at risk in relationship
with the firm, while other scholars claims that the essence of stakeholder management should be
the firm's participation in creating and sustaining moral relationships (Freeman, 1994; Wicks,
Gilbert, & Freeman, 1994) and so on.
What represents employees to a company depends from what angle do we look, actually
all firm theories particularly agency, behavioral, institutional, population, ecology, resource
dependence, and transaction cost, partially intersecting variables (Mitchell, Agle and Wood,
1997) which refer to stakeholders status power, legitimacy and urgency. And if we take into
account these three variables and put the question "Who or What Really Counts" (Freeman and
Reed, 1983) leads to a necessary review of those theories mentioned above.
a) Agency costs theory and employee satisfaction
An agency relationship is defined as one in which one or more persons (the principal)
engage another person (the agent) to perform some service on their behalf which involves
delegating some decision-making authority to the agent (Jensen and Meckling, 1976; Ross,
1973). This theory highlights that the interests of principles and agents diverge.
According to this theory, the principal can resolve this divergence by incurring
monitoring costs designed to limit opportunistic action of the agent (Hill and Jones, 1992). It
may imply bonding costs to guarantee that the agent will not harm the principal, and if the agent
does that the principal will be appropriately compensated. It seems that this divergence reduces
principals welfare, and because it sums up the principal monitoring costs, the agents bonding
costs and also the residual loss (reducing the principal welfare) are defined agency costs.
The problem of this theory - known as agency problem - lies on the desires or goals of
the principal and agent conflict, and that it is difficult or expensive for the principal to verify
what the agent is doing (Eisenhardt, 1989). Therefore, the main purpose of this theory is to

find a way to reconcile the principal interests with the agent interests to ensure that agents serve
the interests of the principals (because principal and agent have different attitudes towards risk
problem known as risk sharing) thereby minimizing agency costs (Shankman, 1999).
A typical agency relationship is settled between shareholders the owners of the
company (principals) and stakeholders the managers of the company or current employees
(agents). Since the primary goal of shareholders is to increase their wealth (Quinn and Jones,
1995), the managers and employees obligations are to accomplish this maximization of owners
profit, relationship that under efficient markets, will lead to the most desirable social outcome
(Shankman, 1999). Therefore, in accordance to this theory, companies will try to motivate their
employees and make them to be satisfied with bonuses, higher wages, pensions, sick and
allowances, taking into account just the financial side.
According to Pagano and Volpin (2006), managers may pay excess wages to create a
natural alliance with employees against possible takeover threats. Under the agency perspective
it is thus possible that more employee satisfaction means the firms is sacrificing value for
shareholders.
b) Stakeholder theory and employee satisfaction
Beyond agency theory, stakeholder theory represents an alternative relation between
companies, managers and the stakeholders. If a company adopts and follows stakeholder
principle (Donaldson and Preston, 1995) and basically engages in stakeholder management, it is
possible that it will perform better.
If we take into consideration the fact that stakeholders are those people who have a stake
in the business (Kotter and Heskett, 1992 ) such as employees, customers, stockholders,
suppliers or communities etc., at some point stakeholder theory becomes unclear (Jones, 1995),
because of stakeholders variety, their needs, purposes to whom we can associate different
methods. Furthermore if we integrate the ethical, fiduciary or social sides, the conclusion that
can be drawn is that stakeholder theory is very general.
Stakeholder theory consists of three others theories descriptive/empirical, instrumental
and normative (Donaldson and Preston, 1995) which tighter shape the stakeholder concept (Evan
and Freeman, 1993).
Instrumental stakeholder theory

Instrumental stakeholder theory was developed by Jones 1995, and it refers to the
balancing of all stakeholders interests in managerial decisions (Jones and Wick, 1995).
The use of this theory consist in identification of stakeholders connections with the firm
by the stakeholder management, to benefit from the support of this groups, which means that
companies need to adopt a particular behavior (Damak Ayadi, 2005) to achieve the ultimate
goal of a firm, to be profitable.
These are the theoretical arguments, which are not fully supported by the empirical
studies and the results of those few empirical studies cannot conclude surely how, if management
makes of this balancing a specific task, in the end both company and stakeholders get (Reynolds,
Schultz & Hekman, 2006) to increase their wealth.
Ogden and Watson (1999) conducted a study in British water supply and discovered that
the costs of improving customer services affects the current profit, but in long term have a
positive impact on shareholders returns, also Edmans (2011) shows that high satisfaction of
employees are correlated with high long run stocks returns.
These studies provide evidence for a long term development, but thinking of todays
financial system is dominated by short termism thinking and this is a problem if we take into
account the egoism theory and stakeholder culture in different countries, like U.S where
shareholders possess the power and employees influence does not count really much while in
Europe the opposite is true (The Economist, 1993); to an egoist the welfare of others counts only
when his welfare is affected (Jones and Bingley, 2007).
c) Resource based view theory with regard to employee satisfaction
Resource based view theory refers at the usefulness of resources and capabilities for
companies in their struggle to be competitive on the market (Hart, 1995), resources being defined
as strengths or weaknesses for companies (Wernerfelt, 1984) or as tangible and intangible assets
which are tied semi-permanently to the firm (Caves, 1980).
The key of this theory relies on the sustainable competitive advantage studied by Barney
(1986, 1991), Peteraf (1993) and Rumelt (1984). However in order to have a sustainable
advantage, a company must control those specific firm resources (Lockett, Thompson and
Morgenstern, 2009) which must complain the VRIN conditions (Barney, 1991) they must be
valuable, rare, inimitable and non-substitutable.
Also resources can be analyzed in terms of functionality, recombination and creation.

Penrose (1959) discovered that firms have the productive opportunity, which she defined
as all of the productive possibilities that its entrepreneurs see and can take advantage of, that
can be influenced by managerial perception and resources under their control. And if those
resources are not completely used, there still is an opportunity for a financial increase.
As I mentioned above this theory refers to capabilities as a base for a sustainable
competitive activity, actually these capabilities mean the ability Penrose (1959) of firms to
combine or to recombine resources. By a recombination of resources companies can add value
(Lockett, Thompson and Morgenstern, 2009) if they are: complementary (Harrison et al. 1991),
related (Dierickx and Cool 1989) or co-specialized (Lippman and Rumelt 2003) in nature.
Regarding resources creation Dierickx and Cool (1989) concluded that intangible assets
are slowly absorbed by the market (Edmans, 2011) and rather than be strategic factor markets,
they are accumulated.
Finally, this theory suggests that if employees of a company provide capabilities that
cannot be easily duplicated (Hart, 1995) they can reach a sustainable competitive advantage in at
least the medium term, so companies need to invest in their employee specialization
(Williamson, 1985) and satisfaction in order to increase the productivity.
d) Human relation theory and employee satisfaction
Compared with the theories already presented, the essence of human relation theory is the
human capital actually refers to the relationship between human resources management and
employees. Here the differences between stakeholders culture can be seen, thus in American
literature the employment relation it is treated only at the micro level (interaction between
employees and management only at the work place), while in British literature employment
relationship goes beyond the American employment relation, being treated at the macro level
(Abbott, 2006).
In the U.S. the concepts of high commitment management or employee involvement are
less important, and this fact could be easily seen in companies actions, laying off employees or
cutting benefits (Strauss, 2008), which means that insecurity persist all around and companies no
longer consider the employees as assets but as costs, situation that cannot make the employees to
be satisfied with their job. Further, such change generates costs for employees as: lack of income

certainty, they will not have power as consumers but also this change has consequences for
employers such as: cuts of profit, unsatisfied customers or closing factories (Gennard and Judge,
2002).
Consequently, if companies perceive their employees only as costs, as we have seen, their
job satisfaction will have low level with negative impact on firms financial performances.
Another interesting study on human relation is the meta analyses conducted by Meyers
et. al (2001) to see if there is a relation and what kind of relation between affective, continuance
and normative commitment to the organization. These studies revealed that correlations between
affective commitment and satisfaction are considerably weaker and in order to understand and to
manage employee behavior (Tett and Meyer, 1993) job satisfaction and affective organizational
commitment should represent tasks, to improve those correlation, for management; also they
discovered that employees with high continuance commitment should intend to remain with
their employer to avoid costs associated with leaving, but the reverse situation is not always
true.
The findings of this studies are helpful for companies to identify where are the potentially
lacks in human resources management and to make their employees more satisfied with their job,
fact that could be beneficial for both sides.
The only weaknesses of these studies are: measurement process and cross cultural
comparisons. Employee satisfaction cannot be fully measured due to intangible status and there
are very few studies which compare cultural differences, relevant for employment relation, based
on empirical evidence, thus comparisons can be made only between academic literature
differences.

2.2 Empirical evidence on how employees could increase organizations value

Porter (1985), Barney (1991), Wright and McMahan (1992), Bailey (1993) and many
others scholars show in their studies that employees can provide a source of sustainable
advantage for companies, only when they satisfy the four VRIN requirements and HRM
practices are aligned with the firms competitive strategies (Huselid, 1995).

But, those studies lack in empirical evidence in order to support the literature side and to
show effectively, that investments in High Performance Work Practices really improve
companies value.
So, I found relevant to proving this relation, from empirical point of
view, the following studies: The Impact of Human Resource Management
Practices on Turnover, Productivity, and Corporate Financial Performance
conducted by Huselid (1995) and Does the stock market fully value
intangibles? Employee satisfaction and equity prices conducted by Edmans
(2011).

These studies are relevant for two reasons: first, they did not

suggest that investments on HRM had a direct impact on firms performance

just because companies with good financial performances are likely to adopt
this kind of practices and consequently results of HRM practices rise firms
value, and second are based not just on questionnaire as measurement
method, because questions could be subjective and this fact can affect the
relevance of the whole study.
Huselid (1995) in his study, started from the assumption that High
Performance Work Practices have an impact on both employee outcomes and
firms short term and long term financial performances, and confirmed
this assumption through samples, which have been drawn from Compact
Disclosure database and questionnaire addressed to human resources staff
in each company studied named Factor Structure of High Performance Work
Practices,

to analyse two factors: employee skills and organizational

structure (Bailey, 1993) - which includes practices designed to grow

employees skills,

knowledge, and abilities and a system which can help

employees to exploit those attributes and to have a positive impact on

productivity process
and employees motivation through he identified the capacity of HRM to
recognize and reinforce employees behavior, relating their appraisal,
compensation and promotion. Also, he used in his study variables like:

turnover to measure employees quitting and firings, productivity as a

measure of sale per employee and corporate financial performances
reflected through market based measure and accounting measure.
Finally, the results of his study showed that high level of High
Performance Work Practices leads to lower turnover and greater employment
security, result that encourage firm to invest in such practices and from
economically point of view companies could obtain significantly benefits from
HRM investments.
On the other way, Edmans (2011) analyzed the relationship between
employee satisfaction and long-run stock returns using 100 Best Companies
to Work For in America portfolio to prove that satisfied employees increase
companies long term shareholders returns.
The importance of Edmans study relies in the fact that he measured
what impacts have employee satisfaction, which is an attitude and also
intangible, on firm value using only financial variables like: returns on the
market, value, size, and momentum factors.
Thus, he concluded that job satisfaction have a positive impact on firm
value, but because it is intangible cannot be capitalized by the market right
away, in reality long run returns are available only when it is realizable the
shift from intangible to tangible outcomes, like earnings announcements and
also he strengthened the idea that results for long-term growth can be
associated with the view that satisfaction is a long-run investment.
Both, Huselid and Edmans studied firms from US and it is true that
there exists other studies that approached the relation between employee
satisfaction and firms value, but all of them was conducted in economically
developed countries, so this is an opportunity and in the same time to

perform other surveys in order to explore the other side of the world, is a
necessity in near future.
2.3 Hypothesis
H0 Null: Employee satisfaction does not affect firm performance
To state that if employee satisfaction does or not affect the firm performances, I will start
from the definition given by Freeman (1984) to stakeholders any group or individual who can
affect or it is affected by the achievement of the organizations objectives. And since employees
are part of stakeholders, its clearly that they affect or can be affected by the organization
activity. This affirmation is supported by employees status they are primary stakeholders who
directly contribute to the success of the company (Bauman and Skitka, 2012).
The relation employer employees has been the subject of various studies, thereby
Cameron (1986), Goodman and Goodman and Pennings (1977), Steers (1975) examined what
measures involves the construct of performances, considering employee satisfaction and
shareholders wealth, Davenport, Harris and Shapiro (2010) defined employees as probably the
greatest assets for a company. More, (Marrewijk, 2004) take a step further and reconsider the
employee satisfaction as mutual respect, credibility and fairness ingredients that matter for
contemporary business.
Finally,

employee

satisfaction

actually

affects

the

company

performances and can increase firms value. Therefore I expect the

hypothesis that states employee satisfaction does not affect the company
performances, to be false.

H1: Employee satisfaction is positively related to firm performance

The supposition that employee satisfaction is positively related or not to firm

performances was approached by scholars like Stein (1989), Huselid (1995) or Edmans (2007,
2011), they found that investments in human capital represents a long run value (Edman,

2007). So the problem is that in short term costs associated with employee satisfaction are
tangible and could decrease the earnings, while investments in employee satisfaction are
observable in long term. As a conclusion, employee satisfaction has a positive impact on firms
value, but in recent years 78% of world (Graham, Harvey and Rajgopals (2005)) CEO are more
likely to sacrifice the long term value to achieve the earnings target (Edmans, 2007).

H2: The relationship between employee satisfaction and firm performance differs when a firm
resides in country with stronger stakeholder culture
This relationship depends in its turns on relationship between CSR and national culture,
here could be applied Hofstedes (1984) national culture dimensions according to what people
value at work that are part of national cultures (Orij, 2009). Thus, if CSR is a global practice,
there exist differences in applying of CSR practices (Guthrie and Parker, 1990), so the same
differences exist in relationship between stakeholders and companies.
Van der Laan Smith et al. (2005) create a model that is based on Hofstedes dimensions,
corporate governance and ownership structure to compare levels of CSR in US and Scandinavian
countries, and they found that in Scandinavian countries companies tend to have a stakeholder
orientation more powerfully than US companies.
Employee satisfaction depends on what kind of culture, stakeholder culture or
shareholder culture, persists in a country. Thus, in countries such the UK, Germany, Netherlands
or Austria shareholder wealth maximization has not been the only or even necessarily the
primary goal of the board of directors (Denis and McConnell, 2003), while in Japan 97% of
managers think that all stakeholders are important (Allen, Carletti and Marquez, 2009).
But, things has changed in last years because under the current financial crises, even in
U.S. where shareholder culture has deep roots, government intervened and gave firms large
amounts of money to take into account the welfare of employees and consumers, even if this
actions are not made in favor of shareholders (Allen, Carletti and Marquez, 2009).
To conclude, the relationship between employee satisfaction and firm value could clearly
observed in this context if we take a look into national economy of each countries and see what
type of thinking prevail: long term thinking or short term thinking.

3. Methodology Regression

Fp

Fp

=+

Es

Fs

Lys

Uc

is a dependent variable and represents the firm performances in an year t.

represents a constant which has the role to highlight the abnormalities.

Es

represents the

employee satisfaction which is an independent employee variable and provide relevance for firm
performance analyze because it has a direct and quantifiable impact on financial results
(Reichheld, 1996; Heskett et al., 1997; Huselid 1995; Edmas 2011).

Fs

is the firm size and as

an independent variable suggest that depends on the firms size, CSR practices are more likely to
be adopted (Fomburn and Shanley, 1990; Robins and Wiersema, 1995).
sales growth,

turnover and

Uc

Lys

is the last year

union coverage are control variable. I use turnover as

a control variable since it is inversely related with job satisfaction and also low turnover is
related with increasing productivity (Huselid, 1995). Finally, I also use union coverage as a
control variable due to positively impact on companies financial performances (Huselid, 1995).

4.Data

Should I state that I will use asset4 to select companies all over the World?! Maybe also
provide a definition of asset4?