Exceptional Employees, More Successful Companies

NEW YORK (TheStreet) -- These days, the phrase "people as a source of competitive advantage" is a persistent drumbeat. Business leaders say it and they seem to really mean it. But is it true? Do companies with the best people outperform those with average people?

Let's run a quick test. The primary goal of virtually every public company is share price growth. Thus, the average chage in share price is probably a good measure of business success.

Next, let's identify companies with the best people. Maybe companies that rank high on Fortune's "Best Companies to Work For" list have the best people. The list includes: Quicken Loans, DPR Construction and Edward Jones.

Are the best employees in America really at Quicken Loans? Or is Fortune's ranking really a competition of pandering to employees? When describing why the winners won, the articles describe pet babysitting services and on-site dry cleaning. But most high-caliber employees place opportunities to work with the best and brightest above such things.

There's a better way to identify companies with the best employees or "human capital." James Surowiecki's book Wisdom of Crowds asserts that a diverse group of people who possess unique knowledge about a given task are, on average, very smart. When it comes to identifying companies with the best people, what does the crowd think?

Every year, CNN/Money Magazine conducts an annual survey of graduating MBAs. The survey asks graduates where they want to work. It uses their choices to rank the 100 most desirable companies for MBAs from U.S business schools. Given that the best young talent (i.e., graduating MBAs) want to learn from the highest-caliber professionals, the survey is probably a reasonable indicator of human capital quality.

Where do the MBAs want to go? Let's look at 2009, which I picked because it predicted five-year share price growth. The  best companies in 2009 grew faster over the next five years than average.

In 2009, the most desired companies were: McKinsey & Company, Google (GOOG), Goldman Sachs (GS), Bain Capital, Apple (AAPL), Microsoft (MSFT) and General Electric (GE), among others. Graduating MBAs believe these organizations employed the superstars.

Did these companies outperform the S&P 500? They did by a lot. On Feb. 12, the five-year return for the S&P was 124%. The return for the top 25 companies of CNN/Money's 2009 "Top MBA Employers" (deleting private companies and subsidiaries) was 217%, a 75% higher return.

This is not proof that human capital drives faster growth in share prices. A few ambitious graduate students can certainly introduce additional measurement rigor. But it is compelling. If the logic holds, and it certainly might, it will be very important for business professionals, human resource professionals and investors.

From the data we draw three conclusions.

First, human capital quality may be a good predictor of business success. Second, more precise measures will help us know if this is true and precisely, what causes it to be true. Is the most powerful predictor senior leadership or is it industry-leading technical professionals? Is the relationship stronger in technology companies than in manufacturing companies?

The third conclusion is that creating a good predictive model could be a gold mine for financial services companies and individual investors.

Over the past five years, Vanguard's Total Bond Market Index was up 6%. Five-year performance for hedge funds (Hedge Fund Research Institute Fund Weighted Composite Index) was up 45%. The S&P 500 index was up 124%.  Vanguard research found that only 43% of mutual fund managers outperformed the S&P 500.

Maybe the best play is to bet on human capital.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Hall was formerly Senior Vice President of Talent at ABN AMRO Bank in Amsterdam and IBM Asia-Pacific's executive in charge of executive leadership and organization effectiveness.

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