How Measuring Health Can Strengthen the Bottom Line

5th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

When coal-producing giant Massey Energy (NYSE: MEE) announced its sale to Alpha Natural Resources, Inc. (NYSE: ANR) recently, it was the end to a long tumble downhill. Ten months earlier an explosion killed 29 of the 31 miners at Massey’s Upper Big Branch coal mine in Montcoal, West Virginia. Foreshadowed by more than 500 safety violations in 18 months at Massey, this disaster brought to national attention how an unsafe culture can destroy lives – and impact the bottom line with million-dollar fines.

Investors can discover information about potential risks to the companies in their portfolio from public sources, such as the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) website. Obviously, companies that ignore safety find themselves at risk for lowered morale, higher turnover, increased accidents and damages, and potentially large lawsuits – all of which can affect the bottom line. Leaders in safety tend to boost their profitability by valuing and training employees to avoid those risks.

HIP Health Metrics

Solving human needs – Health, Wealth, Earth, Equality and Trust – can be profitable (as described in our previous article). This feature delves into metrics of physical and mental health that can be leading indicators of financial performance. As with each of the five needs, you can evaluate a firm across customer, employee, and supplier perspectives.

There are five groups of quantifiable metrics a HIP (“human impact plus profit”) investor can use to evaluate companies in Health:

1. Customer satisfaction

Customers who are happy – and thus mentally satisfied – return to buy more, and tell others about their positive experience. They could be satisfied by the innovative applications that run on the Apple iPhone (Nasdaq: AAPL), the accommodating customer service at Nordstrom’s (NYSE: JWN), or the breakthrough eco-efficiency of the Toyota Prius (NYSE: TM).

Consulting firm Bain has measured that the most profitable customers of a firm are its repeat customers. Once a customer finds a product that solves a problem, they tend to buy again, as long as the company keeps them happy. When customers become net promoters (i.e., willing to recommend a company to others), the firms experiences the highest revenue growth. Where can you find data on customer satisfaction? Try www.TheACSI.com, which covers many companies in the US, UK, Sweden, Singapore and Mexico.

In its book "Satisfaction", the consultancy JD Power showed that increasing and high customer satisfaction typically drives higher levels of top-line revenue, bottom-line profit and thus, shareholder value.

2. Employee satisfaction and retention

Employee satisfaction is linked with good customer relations and with overall increased productivity. To head off employee turnover and to promote high staff engagement and retention, financial software company Intuit (Nasdaq: INTU) proactively addresses employee engagement and managerial competence. Intuit comprehensively surveys its 8,000-plus staff annually in November about overall satisfaction with the work environment and managers. Intuit typically gathers a phenomenal 92 percent response rate with its online survey. The results scores are then used by managers to start a dialogue with employees about ways to improve the workplace. Sometimes this leads to clearer manager communication or improved focus to address important issues. For the manager’s senior leaders, the scores can also indicate opportunities for leadership development, coaching, or a role change. Intuit’s investment in high retention has kept turnover—and the associated costs—lower than competitors.

3. Wellness programs for staff

Employee health and well-being has a direct effect on company well-being and profitability. HIP investors should look for companies that provide health insurance coverage for the majority of its employees. Higher HIP scores flow from companies that go further and invest in wellness programs that promote healthy lifestyles.

Safeway’s (NYSE: SWY) innovative health-insurance pricing schedule has saved it money and improved the health of their employees. Since its inception in 2005 until 2009, overall wellness initiatives at Safeway have kept health care costs for the company flat on a per capita basis, while most American companies’ costs have increased 38 percent over the same four years, according to its CEO Steve Burd. By encouraging healthy action by reduced premium payments, Safeway employees have reduced their obesity and smoking rates to roughly 70 percent of the national average. This, coupled with a 78 percent employee satisfaction with healthcare rating, makes a HIP, happy, healthy – and potentially more profitable – workforce.

4. Employee safety

Like employee health and wellness, a safe work environment has many financial benefits to companies—more consistent productivity, high staff morale, lower medical expenses or insurance premiums—and it produces a positive return on investment for a group of the company’s most valuable assets: its employees.

Alcoa (NYSE: AA), shares real-time accident ratios. (http://bit.ly/bYRbdT) In January 2011, 91.7 percent of Alcoa’s 212 locations globally had zero recordable injuries, and 99.5 percent of those sites had zero lost workdays.

In the 1980s, CEO Paul O’Neill made job safety the core metric on which senior executives were measured. For shareholders, his focus on human impact and profit multiplied Alcoa’s shareholder value by 10 times from $2.9 billion in 1987 when he started, to $29.9 billion when he retired in 2000.

5. Stakeholder and community health

Corporations can both benefit their bottom line and reduce their overall operating risk by engaging the communities in which they operate. Many non-U.S. markets (think India, China and Brazil) provide high-growth opportunities for creative corporate approaches.

For example, in Rio de Janeiro, the health care firm Johnson and Johnson (NYSE: JNJ) has partnered with Mobile Metrix, a nonprofit, to investigate the needs of the low income, base-of-the-pyramid communities. The nonprofit pays locals to collect the information with handheld digital devices, which create jobs as well. “We can help increase access to health care, boost income for those collecting the data, and create a new market for corporations,” says Melanie Edwards, founder of Mobile Metrix. J&J can then target the right products to the right customers—something not possible without this census-type data. It also can generate new revenues and profits while the community’s health profile increases with access to affordable health care products, the wealth from income-paying jobs goes up, and more Equality is realized.

Next time, we will explore how Wealth metrics for employees and stakeholders can spur potential profit as well as positive impact. By investing with these principles, you can reduce risk, seek increased returns – and reward firms who build a better world.

To navigate this series, please use this table of contents.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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